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Europe Taking a Breather

Hedgeye Position: Long Germany (EWG); Short Euro (FXE), Short Italy (EWI)


Yesterday we shorted Italy and the EUR-USD off a two-day bounce in equities and declines in peripheral yields. We called out the move as a dead-cat bounce and continue to stress that despite immediate term market swings, over the intermediate to longer term we expect the risk premium across Europe to remain elevated as the risk associated with the sovereign debt contagion spreads to the likes of Portugal, Spain and Italy.


That said, we’re seeing another day-over-day decline in risk via 10yr bond yields from the PIGS (except Italy) that is worth a call-out (see chart below). Further the EUR-USD has gained ground, currently at $1.3365, which we shorted into.


Europe Taking a Breather - mhh1


This lift comes into and out of ECB President Jean-ClaudeTrichet’s announcement yesterday morning to hold the ECB’s benchmark lending rate steady at 1%, and no step-up to its €67 Billion bond purchasing program, which the market was largely speculating on given the Fed’s $600 Billion QE2 injection (Quantitative Guessing) and the Bank of England’s larger bond purchasing program of £200 Billion.


The ECB will keep offering banks unlimited loans through the first quarter over periods of seven days, one month, and three months. That marks a shift from last month, when Trichet said that the ECB could start limiting access to its funds, a position long voiced by Bundesbank President Axel Weber.


Positive Data, on the margin


-The Bundesbank revised upward its GDP forecast for Germany in its bi-annual economic outlook today:


3.6% in 2010 (vs June estimate of 1.9%)

2.0% in 2011 (vs 1.4%)

1.5% in 2012


-Final readings of November Manufacturing and Services PMIs, released on Wednesday and today, respectively, showed month-over-month gains for the majority of the reporting countries:


Positive Divergences: UK Manufacturing rose to 58.0 in November versus 55.4 in October and Germany Services jumped to 59.2 vs. 56.0.


Negative Divergence: Spain Services rose M/M to 48.4 but remain under the 50 line, denoting contraction. Italy Manufacturing fell to 52.0 vs 53.0.


Europe Taking a Breather - mhh2



Keep your risk management pants on and have a great weekend!


Matthew Hedrick



TODAY’S S&P 500 SET-UP - December 3, 2010

As we look at today’s set up for the S&P 500, the range is 26 points or -2.01% downside to 1197 and 0.12% upside to 1223.  The unemployment rate edged up to 9.8 percent in November, and nonfarm payroll employment was little changed (+39,000), the U.S. Bureau of Labor Statistics reported today. S&P 500 futures dropped sharply on the number. 

  • Coldwater Creek (CWTR) 3Q loss-shr narrower than est.
  • Emergency Medical Services (EMS) bought Milford Anesthesia
  • Novell (NOVL) 4Q rev. beat est.
  • Phillips-Van Heusen (PVH) forecast 4Q EPS below est.
  • Sunoco (SUN) agreed to sell Toledo, Ohio, refinery to Toledo Refining for $400m
  • Ulta Salon Cosmetics & Fragrance (ULTA) sees 4Q rev. inline with est.
  • VeriFone Systems (PAY) Sees FY2011 adj. EPS, sales above est.


  • One day: Dow +0.95%, S&P +1.28%, Nasdaq +1.17%, Russell 2000 +1.08%
  • Month-to-date: Dow +3.24%, S&P +3.47%, Nasdaq +3.25%, Russell +3.33%
  • Quarter-to-date: Dow +5.32%, S&P +7.04%, Nasdaq +8.90%, Russell +11.10%
  • Year-to-date: Dow +7.94%, S&P +9.54%, Nasdaq +13.67%, Russell +20.12%
  • Sector Performance: Financials +2.56%, Materials +1.52%, Industrials +1.55%, Energy +1.49%, Consumer Disc +1.30%, Tech +1.19%, Healthcare +0.78%, Utilities +0.29%, Consumer Spls +0.07%


  • ADVANCE/DECLINE LINE: 1270 (-416)  
  • VOLUME: NYSE - 1115.48 (-0.28%)
  • VIX:  19.39 -9.22% - YTD PERFORMANCE: -10.56%
  • SPX PUT/CALL RATIO: 1.58 from 1.67 -5.45%  


  • TED SPREAD: 15.74 -0.101 (-0.640%)
  • 3-MONTH T-BILL YIELD: 0.16%
  • YIELD CURVE: 2.46 from 2.44


  • CRB: 312.10 +1.03%
  • Oil: 88.00 +1.44%
  • COPPER: 397.90 +0.80%
  • GOLD: 1,386.95 -0.28%


  • EURO: 1.3204 +0.57%
  • DOLLAR: 80.303 -0.51%




  • FTSE 100: 0.00%; DAX (0.08%); CAC 40 +0.34%
  • Markets are mixed to unchanged in light trading following strong gains seen in the previous two sessions as investors rediscover an appetite for risk.
  • ECB bond purchases during the previous session threw down the gauntlet to euro skeptics who doubted the bank's resolve to back up its rhetoric with decisive action.
  • Strong headline economic data and the fact that equities currently offer investors better returns than government or corporate bonds are also factors underpinning sentiment in the asset class.
  • Last night, S&P warned it could cut Greece's BB-plus credit rating if it becomes clear that the proposed European Stability Mechanism will favor public creditors to the detriment of private bond holders
  • EU Commission makes unannounced inspections in pharmaceutical sector
  • Eurozone Nov Final Services PMI 55.4 vs prelim 55.2
  • Eurozone Oct Retail Sales +1.8% y/y vs cons +1.0%
  • Germany Nov Final Services PMI 59.2 vs prelim 58.6
  • France Nov Final Services PMI 55.0 vs prelim 55.7
  • UK Nov Services PMI 53.0 vs cons 53.0


  • Nikkei +0.10%; Hang Seng (0.55%); Shanghai Composite (0.04%)
  • Closed mixed with Shanghai and Hong Kong lower on nagging fears China may take more steps to rein in inflation.
  • Investors are starting to price in another increase in banks' required reserve ratios and a rate rise by the end of the year.
  • Gold miners fell on profit-taking, and coal miners declined on a report that Beijing has frozen prices for next year in a bid to control inflation.
  • The Nikkei ended marginally higher having earlier hit a 6-month intraday high, lifted by stronger than expected US economic data and on talk of ECB activity in bond markets  

Howard Penney
Managing Director


The Macau Metro Monitor, December 3rd, 2010



The Office of the Secretary for Transport and Public Works said, "The government will announce the result [of Sands China's application for sites 7 & 8] in the most convenient time." This is in reference to Sands' right to appeal the rejection of its application for parcels 7 & 8 within 30 days.


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Less Is A Good Thing

“Less Is A Good Thing.”

-Jason Fried & Heinemeier Hansson


At our year-end Hedgeye meeting this week, this was the most valuable take-away from the aforementioned bestselling authors of “REWORK.”


My immediate term support and resistance levels for the SP500 are 1197 and 1223, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


We made a few calls to see how things are going.  It’s a small sample and definitely not reflective of the entire CMG system, but gangbuster numbers were not the order of the day.  The results were mixed with some characterizing business as steady-to-slightly slower than three months ago.  Several attributed this slowdown to seasonality.  For those stores that stated business was up YOY, the magnitude of growth for the most part was not as great as we have seen from CMG as a whole (posted +11.4% comp growth in 3Q10).  It is worth noting, however, that for those stores saying that business is flat versus 3 months ago, trends are still strong.  Flat two-year trends in 4Q10 imply, approximately, a 12% comp growth on a YOY basis.


Chipotle, CO

  • “Denver is where Chipotle started so we have a pretty big customer base and following.  Business has not slowed down with us we are generally pretty full and busy, especially during lunch and dinner.”
  • “We have gotten more customers and business compared to last year, it’s kind of hard to tell because when you’re always full at certain times to count the change.  I would say my best estimate would be maybe 2% more than last year.”
  • “Per month I can’t give you it’s just really hard to tell the difference, we are busy but it’s pretty consistent.”


Chipotle, MD

  • Stated the stores will have been open for about 3 years in a couple of months
  • Stated that compared to last year they have seen a 1 to 2 percent increase “Business has been slightly up compared to last year”


Chipotle, FL

  • Characterized business as "Up"
  • "Lunch is our most busiest, but we do get a decent amount for dinner to"
  • "I'm not sure about a percent I know we are little busier than usual"


Chipotle, NJ

  • We asked about business in general YoY.
  • He said that it is about the same.
  • We asked about 3 months ago compared to now - manager said that they were busier in the summer, but for them that is expected. Their location is always busier in the summer.
  • We asked if they are meeting the projections - manager said that the sales trends are following what they would expect. Things are pretty steady.


Chipotle, NY

  • We were transferred to the manager and asked him how business is compared to last year.
  • Manager said that they are in line with their numbers, which are about 5% growth from last year.
  • Another location opened pretty close to them a few months ago and it took a little away from them.
  • We asked how business is now compared to 3 months ago and the manager said that they are about the same, flat really.


Chipotle, IL

  • We asked about business YoY and the manager said that they are a little busier - about 3%.
  • We asked about now compared to 3 months ago - manager said that they are less busy now by a little bit.
  • We asked how much - he said 1½ or 2%.
  • We asked why - he said probably because they are downtown and it’s getting pretty cold out.

Howard Penney

Managing Director


Moderation Down Under?

Conclusion: Growth is setup to slow meaningfully in Australia over the intermediate term due to a confluence of two main factors: waning Chinese/Asian demand and a deteriorating consumer sector.


Admittedly, we don’t write about Australia much and that is a direct result of consensus understanding the Aussie trade – long the Aussie dollar as a play on growing Chinese demand for raw materials and long Australian equities as a play on the dollar-down/commodities-up reflation trade.


Looking “down under” now, we continue to receive confirmation that the two tailwinds that have supported the Aussie dollar’s +7.1% YTD gain and recent equity market strength are eroding, as: 

  1. Chinese growth looks to continue to slow into 1H10 as the government continues to aggressively fight inflation with rate hikes, reserve requirement hikes, margin hikes, price controls and supply rationing.
  2. The U.S. dollar looks to continue strengthening from here, which dampens reflationary pressure in the commodity markets. We don’t buy any of the bullish HOPE associated with EU bailouts, etc. As such, we contend Sovereign Debt Dichotomy is alive and kicking for intermediate-term TREND. 

Within the Australian economy specifically, growth appears to be moderating as both internal and external demand wanes. Australian YoY GDP growth slowed sequentially by (-47bps) from 2Q10 to 3Q10, coming in a +2.65% in the latest reading. A slight positive to the report was that inflation as measured by YoY CPI also slowed in 3Q10, which suggests the prudent rate hikes of RBA Governor Glenn Stevens have warded off the inflationary pressure that continues to plague many other Asia-Pacific nations for now.


Moderation Down Under? - 1


One side effect of slowing growth and four interest rate hikes YTD is weakness in the consumer sector, which is highlighted by Australian October Retail Sales growth exhibiting the sharpest MoM decline since July 2009 at (-1.1%). While we aren’t necessarily lamenting the Aussie consumer for refusing to lever up and spend beyond their means like we continue to do in the U.S., we are calling out slowing growth for what it is.


Moderation Down Under? - 2


The consumer spending decline is driven by a confluence of two factors: 1) weakness in the Australian labor market; and 2) higher mortgage rates constraining consumer finances.


Australia’s Unemployment Rate ticked up +24bps in October to a YTD high of 5.39%. Further, Australian Job Adds growth decelerated in the month to +29.7k from +49.6k in September; the slowdown was driven by an decrease in full-time employment (-14.1k), though that was more than offset by an increase in part-time employment (+43.8k). At any rate, replacing full-time hires with part-time labor is usually indicative of softness in the labor market and the economy at large. Further, wages and benefits for part-times employees typically lag those of full-time staff.


Moderation Down Under? - 3


Higher mortgage rates also remain a headwind for the Australian consumer going forward, which is evidenced by Australian Consumer Confidence falling in November to the lowest level since June (110.7; down -5.3% MoM). A gauge of family finances dropped (-10.2%) MoM, which is particularly supportive of the view that the rate hikes are constraining consumer spending (more than 2/3rds of Aussies own homes and ~90% of Australian homeowners have variable-rate mortgages; also, household debt is greater than 150% of pretax income). 


Moderation Down Under? - 4


Exacerbating this credit headwind is the fact that Australia’s largest mortgage lenders have been increasing mortgage rates even beyond the scope of policy rate hikes. Both ANZ Bank and Commonwealth Bank of Australia have increased variable-rate mortgage rates by an average of 168% of the latest 25bps policy rate hike. Treasury Secretary Wayne Swan recently called the moves a “cynical cash grab”, yet no official action has been taken to provide relief for the Australian consumer’s shrinking discretionary budget.


Given this setup, it’s no surprise to see that Australia’s Household Savings Rate ticked up 130bps QoQ to 10.2% of disposable income in 3Q10, which lends further support that  confidence in household finances is deteriorating.


Moving to the manufacturing sector, we see continued weakness there as well; PMI contracted for a third straight month, falling in November to 47.6 from 49.4 in October, with the employment subcomponent index falling 4.3 points to 45.9. Capacity Utilization also fell (from a two-year high, albeit) to 74.6% vs. 77.4% in October.


Moderation Down Under? - 5


These numbers are indicative of the weak external demand highlighted above from slowing growth abroad. Compounding this slowdown in mining and manufacturing is the fact that Australian budget deficit will come in wider than initially anticipated due to Aussie dollar’s strength (exporters’ revenue missed government projections). The total shortfall for FY11 will be ~A$800 million larger at A$41.5 billion and the deficit for FY12 is likely to come in at A$12.3 billion, up from the initial projection of A$10.4 billion.


This latest miss has recently-elected Prime Minster Julia Gillard weighing spending cuts in order to honor her election promise of a balanced budget within three years time. At this point, the Australian economy is on the tipping point of a meaningful slowdown in growth, so the potential for increased fiscal conservatism may exacerbate the slowdown over the intermediate term.


From a quantitative perspective, Australia’s S&P ASX All Ordinaries Index is bullish from an intermediate-term TREND perspective and ever-so-slightly bullish from an immediate-term TRADE perspective after having closed up +1.8% overnight.


Darius Dale



Moderation Down Under? - 6

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