Europe’s Band-Aid Rollercoaster

Position: Short Euro via FXE; Long Germany (EWG)


We want to make the quick point that although European equity indices look to be pricing in some form of bailout for Ireland today—most indices closed up +1.5% today across western and eastern Europe and Greece's ATHEX gained +2.6%—Europe’s sovereign debt crisis is far from over.


While this is an obvious point given the media’s attention on Europe’s debt and deficit ails, it’s worth restating our position that we believe there is a fundamental economic flaw in the Union of unequal states (the Eurozone), whereby states are effectively handcuffed from using monetary policy measures, such as inflating away debts or increasing trade competitiveness through currency debasement, to better maneuver economic developments.


While Greece got its €110 billion band-aid in May of this year and Ireland will soon get its own, the underlying “issues” afflicting the region cannot be solved with one-off bailout packages. On the contrary, we think that piling more debt upon debt is only going to compound the interconnected risk associated with the long-term issue.


While it could be argued that the Union of different parts proved beneficial to the whole in “good” economic times, the downturn from the world’s great recession is demonstrating a far different outcome and outlook for the Eurozone’s bound states.  


In particular, we’d expect that bond yields for Europe’s fiscally imbalanced countries to maintain a wide spread over credit-worthy German paper as sovereign debt concerns persist into 2011.


As the chart below shows, despite the performance of today’s equity market across Europe and a slight decline in government bond yields from the PIIGS since an immediate term high on 11/11, we’d expect government yields across Europe’s periphery to continue to rise.


As yields push up so too does the cost of capital which further strains a country’s ability to refinance and raise debt, which in turn snowballs the perceived sovereign default risk. And so the cycle of credit risk, short of bold austerity measures to cut debt and deficit levels, persists gravely…  


Matthew Hedrick



Europe’s Band-Aid Rollercoaster - mh1

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more