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Who is Germany’s New Bundesbank President?

Today German Chancellor Angela Merkel named Jens Weidmann as the new Bundesbank President to replace Axel Weber following his formal indication late last week that he will leave his post at the end of his term on April 30th, and will not run to succeed ECB president Jean-Claude Trichet, whose term ends in October.

 

Weber’s decision to step down (and he was widely viewed as the top candidate to succeed Trichet), as well as the appointment of Weidmann, are significant as it relates to the shape of Germany’s and Europe’s monetary and fiscal policy. So who is Weidmann?

 

CV

-Born on April 20, 1968

-Age 42 = the youngest head of the German central bank in its 54-year history and also the youngest member of the European Central Bank’s governing council

-Married with two children

-Ph.D. in economics at Bonn University

  • 2006 – Present: currently Merkel’s senior economic advisor and head of the economic and financial directorate of the Federal Chancellery
    • He is also German’s “Sherpa” for meeting of the G8 leading nations and G20 industrialized and developing countries
  • 2003-2006: head of Bundesbank’s Monetary Policy and Analysis Group
  • 1: Weidman served as secretary-general of the German Council of Economic Advisors (the 5 German wise men)
  • 1997-99: worked for the IMF in Washington
  • ~1987: studied economics in Aix-en-Provence, Paris, and Bonn and did internships at the Bank of France, the German economic ministry and in the central bank of Rwanda

Past Stances:

  • Weidmann worked feverishly behind the scenes to hammer out rescue plans for German banks embroiled in the global financial crisis and for carmaker Opel
  • Last year, he quietly supported Economy Minister Rainer Bruederle’s right to reject aid for Opel, the European arm of U.S. carmaker General Motors, even though Merkel was in favor of providing assistance to safeguard German jobs
  • He urged Merkel to resist quick aid for Greece and to involve the IMF in any European aid program, winning both arguments over the opposition of Finance Minister Wolfgang Schaeuble

What’s clear is that Weber leaves a large leadership hole with his departure, not only due to his experience, but in our opinion, due to his hawkish and conservative policy values, including dissention with Jean-Claude Trichet. Weber displayed firm opposition to the ECB’s bond repurchasing program; was proactive in addressing inflation threats to maintain price stability; and voiced opposition to blanket bailout facilities for Eurozone members.

 

In short, we question if Weidmann will remain true to the former Bundesbank ideals of hawkish monetary and fiscal policy. His Ph.D. professor Manfred Neumann said, “ He’s a contrast to Weber, not in terms of substance but in his manner.” Clearly the Francophone Weidmann has been shaped by Weber, who he studied under and was hand-selected by in 2003 to join the CB, and comes to his new role with great achievement, most currently as Chancellor Merkel’s main economist to direct Germany’s policy through the financial, economic and Eurozone debt crisis.

 

We’ll let actions speak for themselves, however we hope that Weidmann can uphold where Weber left off in influencing hawkish fiscal and monetary policy on the ECB council, and moreover helps shape the threat of rising inflation throughout the region and policy to deal with the ongoing debt and deficit imbalances of some Eurozone member states.

 

This week we’ll publish on the leading candidates for the ECB presidency.

 

Matthew Hedrick

Analyst

 


Bullish on Bread – Trade Update

 

Position: Long grains (via the etn JJG)

 

We added a long position in soft commodities via the etn JJG in the Hedgeye Virtual Portfolio.  The etn was on sale yesterday due to strength in the US dollar and a strong soybean crop report out of Brazil, and we jumped on the buying opportunity.  As a reminder, commodities (measured by the CRB commodity index) have a -0.80 inverse correlation to the US dollar over the last six weeks.

 

We have recently been playing the softies with long positions in corn (etf CORN) and sugar (etn SGG), though here and now we prefer JJG because it has a lower beta.  JJG gives you a nice mix of grain exposure with positions in the futures contracts of soybeans (39%), corn (37%), and wheat (24%).  Long JJG is an excellent way to be long inflation.

 

JJG was added into the portfolio at $55.18.  From a quantitative setup, JJG has no upside resistance and TRADE line support at $54.34 and TREND line support at $51.03, suggesting a favorable near-term risk-reward setup.

 

Bullish on Bread – Trade Update - JJG

 

Kevin Kaiser

Analyst


Contemplating Oil Supply and Demand in the U.S.

 

Conclusion: While we continue to have a bullish view of oil based its quantitative set up, as a proxy to benefit from a weak U.S. dollar, on geopolitical risk premiums, and due to strong emerging market demand patterns, we would also be remiss not to highlight anemic U.S. demand on the negative side of the equation.

 

Position:  Long oil via the etf OIL

 

We are starting to see Egyptian and Tunisian type popular tensions spread to some key oil producing states, which should provide a key support under the commodity.  Specifically, both Iran and Libya have seen an increase in protests.  This is relevant because, based on the most recent data, Iran is the second largest producer of crude oil in OPEC, at 3.7MM barrels of oil per day, and Libya is a sizeable producer as well at 1.6MM barrels of oil per day.

 

At this point, it is difficult to determine what direction the popular unrest in these major oil producing countries will take, but obviously a potential disruption of production in either of these nations is much more critical to global supply then either Tunisia or Egypt (less than 600K barrels of production per day).  Egypt relevance is more related to its control of the Suez Canal, which controls more than 8% of the world’s sea trade – of which a large component is oil headed for Europe.

 

As a proxy for the status of the situation in the Middle East, we’ve been following the price of Brent oil, which is produced in the North Sea.  As the actual or perceived threat of a supply or transportation disruption in the Middle East occurs, Brent should be bid to a premium versus its global counterparts.  Currently the spread on front month futures in the U.S. is as almost as wide as it has ever been, with Brent trading at ~$102 per barrel and West Texas Intermediate trading at ~$85 per barrel, for a spread of $17.

 

In addition to the Middle Eastern dynamics, apparent weak demand for consumer fuels in the United States, namely gasoline, is one force that is driving the almost record divergence between WTI and Brent.  As our Energy Sector Head Lou Gagliardi continues to highlight in his research, Cushing, Oklahoma is flush with supply.   Cushing is the primary hub for transporting oil in the United States, and at any time stores up to 10% of North American supply.  Cushing inventories are currently as high as they’ve been since 2004, and have risen 10 of the past 13 weeks.

 

In fact, according to data from Department of Energy, gasoline inventories in aggregate in the United States, as of the month of January, are 3.4% above the high of the normal range.  In addition, distillates are 4.8% above the high end of their normal range.  These inventory builds are not surprising given that retail gas prices have risen to almost $3.14 per gallon, which is comparable to the highs of October 2008. 

 

Naturally, with rising prices comes a degradation of demand, which we are starting to see in inventory builds and actual purchases of gasoline.  According to Master Card, which tracks weekly purchases of gasoline, gasoline demand was down sequentially week-over-week almost 3%, though still up 2.6% year-over-year.  The real wild card for demand is of course the summer driving season and the price of gasoline at that point in the season.

 

To that point, according to the Department of Energy:

 

“There is also significant uncertainty surrounding the forecast, with the current market prices of futures and options contracts for gasoline suggesting a 35 percent probability that the national monthly average retail price for regular gasoline could exceed $3.50 per gallon during summer 2011 and about a 10 percent probability that it could exceed $4.00 per gallon.”

 

Clearly, given the trajectory we are on, there is some possibility that gasoline reaches a much more elevated level this summer, in which case we should expect to see a continuation of demand degradation and inventory building.  This is not to say there aren’t many benefits to owning oil, but we need to be aware that the current supply factors of the world’s largest consumer of oil, the United States, are bearish.

 

Daryl G. Jones

Managing Director

 

Contemplating Oil Supply and Demand in the U.S. - oil7


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HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START

The report below was originally published at 9:05AM EST by Josh Steiner and Allison Kaptur of our Financials Team, which does the bulk of our firm's work on housing. Below, they provide a detailed update to our 1Q11 Macro Theme of Housing Headwinds Part II. While consensus scrambles to figure out inflation's impact, we think it's worth highlighting a form of deflation that will limit consumer ability to absorb price increases in 2011. If you are a qualified institutional investor and would like to hear more about their work on the fins, rates, credit, housing and financial regulation, please email sales@hedgeye.com.

 

 

Multifamily Starts Drive Headline Number Higher; No Good News for Single-Family Homes

While the headline starts number for January was reported 14.6% higher this morning, all the strength came from multifamily starts.  Multifamily Starts (2 or more family homes) nearly doubled, increasing 78% MoM.  Multifamily Permits fell 24% MoM.  As the charts below demonstrate, multifamily starts and permits are a volatile series.  

 

In the single-family space, which is relevant to the homebuilders, there was no good news.  Single-family starts decreased 1% to 413, and single-family permits decreased 5%.  Interestingly, permits had been steadily rising since September, so the January data is a reversal.  This is only one data point, but we will be watching this trend closely to see if it continues.

 

Bigger picture, the permits and starts data along with the purchase applications data, which we cover below, suggest the Spring selling season is off to a rocky start - a sharp contradiction to the enthusiasm put forward by six of the top ten homebuilder CEOs. We would also highlight the rising cost pressures homebuilders are facing based on the significantly higher year-over-year costs in lumber, copper and oil (see our note from 2/11/11 on this topic for details).

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 1

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 2

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 3 

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 4

 

The chart below shows the relationship between single-family starts and unemployment (shown inverted on the right axis). Historically, increasing construction jobs have helped pull unemployment back down.  Thus far in the current cycle, this pattern does not look likely. 

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 5

 

MBA Purchase Applications fall 6%

MBA Purchase Applications fell 5.9% WoW on a seasonally adjusted basis.  Refinance applications fell 11% WoW to the lowest level since July 2009.  While it remains early in the spring selling season, signs of strength remain elusive. On a year-to-date basis, Purchase Applications are at the same level as they were in 1996.  

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 6

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 7

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 8

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 9

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 10

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 11

 

Zillow data shows high level of negative equity

According to a report from Zillow Inc., a real estate website, 27% of mortgaged single-family homes (or 15.7 million homes) were in a negative equity position as of 4Q10.  This number climbed versus the prior quarter, when 13.9 homes were underwater. The number of underwater homeowners was drive by two factors. Falling home prices pushed more borrowers into negative equity positions, while a slowdown in foreclosures meant that fewer seriously delinquent borrowers were evicted.  Work from Laurie Goodman at Amherst and others has demonstrated that negative equity is highly predictive of borrower defaults, so a rising level of underwater borrowers should be a significant concern.  

 

Housing Market Index: Deja Vu at 16 

The Housing Market Index, which measure builder confidence, remained unchanged for a fourth month in a row in February, holding steady at 16.  The chart below shows the HMI composite metric against new single-family starts.  By any historical measure, the current level of activity is very low.  

 

HOUSING HEADWINDS: MORE EVIDENCE THAT THE SPRING SELLING SEASON IS OFF TO A ROCKY START - 12

 

Obama Budget Proposes Cut to Mortgage Interest Tax Deduction 

Obama's 2012 budget proposes cutting itemized deductions by 30% for the affluent (those making over $250,000). Not surprisingly, the National Association of Realtors has already begun aggressive lobbying to get this proposal dropped.  

 

Page 40 of the budget proposal reads:

"Reduce the Itemized Deduction Write-off for Families with Incomes over $250,000.  Currently, if a middle-class family donates a dollar to its favorite charity or spends a dollar on mortgage interest, it gets a 15-cent tax deduction, but a millionaire who does the same enjoys a deduction that is more than twice as generous.  By reducing this disparity and returning the high income deduction to the same rates that were in place at the end of the Reagan Administration, we will raise $291 billion over the next decade."

 

Joshua Steiner, CFA

 

Allison Kaptur


Athletic Apparel Trends Strengthening

 

The weekly athletic apparel data came in strong last week with sales improving on a sequential basis across all channels. The biggest improvement came from both the family and discount/mass channels with a more modest uptick in the athletic specialty channel. These results also mark the second week in a row that ASP’s increased across every channel.  We believe this is in part to clean inventories coming out of the holiday transition period.  Lastly, double digit increases were reported across most regions with one exception.  There remains a divergent trend in the Pacific region, which reported a fourth straight week of decline down -5%.

 

Athletic Apparel Trends Strengthening - FW App App Table 2 1 11

 

Casey Flavin

Director


HYATT YOUTUBE

In preparation for Hyatt’s Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from Hyatt’s Q3 earnings call.


 

YOUTUBE

  • “During the third quarter, occupancy levels, as compared to the prior year, increased in over 75% of the hotels that we operate around the world. Average rates at our full-service hotels increased this quarter on a global basis. This was a continuation of rate increases that we saw internationally earlier in the year, and in North America the increase came primarily as a result of the shift in business mix from lower rated transient to higher rated transient business and increased group demand.”
  • “As a part of our strategy to recycle capital, in order to expand and increase distribution, we expect to be in the market from time to time on both the buy-side and the sell-side. As we mentioned on our last earnings call, we were exploring the sale of 11 properties, during the third quarter we sold one of those properties… at this time our best estimate is that we will sell between three and five additional hotels over the next few months. We expect to announce sales as they are closed. In terms of the remaining hotels that were a part of the group of 11 properties, it is unlikely that we will sell them in the near term.”
  • “Results in North America were negatively impacted by renovations at five owned properties”
  • “The margin [at owned hotels] improvement was largely a result of continued productivity gain and improved food and beverage profitability.”
  • “Our full-service hotels experienced a 20% increase in group room nights with essentially flat room rates compared to last year. The strength in the group business was partially a result of good turnout for association business that was on the books, as well as recently booked corporate business. Our food and beverage revenue has increased… driven by higher banquet and catering revenues as group customers increased spending in these areas. Expenditure by group customers in other areas, such as spa services, remains relatively weak.”
  • “The group revenue base for 2010 continued to improve through the third quarter and is up over 3% for the full year. In the quarter, bookings for the year were up over 60% based upon room nights and at higher rates, partially as a result of corporations booking meetings with relatively short lead times.”
  • “Our transient guest mix across different channels continued to improve as more business was realized through our own channels as opposed to third party owned websites, including discount internet channels”
  • “RevPAR in China increased approximately 50%, partially due to greater demand in Shanghai as a result of the World Expo. We experienced RevPAR growth in other Asia-Pacific region countries including Japan, Korea and Australia, between 5 and 10%. The southwest Asia region realized RevPAR growth lower than that of the other regions as RevPAR growth was still positive, was weaker in the GCC countries than in other parts of the region.”
  • “On capital expenditure, we have lowered our range to 250 to $260 million. Part of our capital expenditure relates to broad scale renovations at five of our owned hotels. Based on our estimates of displaced revenues, the fourth quarter 2010 negative impact is expected to be about 350 basis points to own and lease RevPAR and approximately $8 million of EBITDA. We estimate that during the first three quarters of 2011, the cumulative negative impact of the renovation at these five hotels could approximate between 300 to 350 basis points of RevPAR to our owned and leased segment and in the range of between 20 to $25 million of EBITDA.”
  • “Other information relating to 2010 is as follows; our estimate of depreciation and amortization expense is now slightly lower at between 275 million to 285 million, the interest expense range remains the same at between 50 to $55 million.”
  • “Our intent as we begun the [corporate rate] negotiations, is to try and seek, in any way from a mid to a high single-digit rate increase, the corporate rates are pushing back. They’re looking for a flat to a decrease. Given the uncertainty in the economy, especially in the U.S. things have lagged a little. But I think the industry is more focused in trying to get anywhere between mid to high single-digit rate increase.”
  • “Now what’s beginning to happen is because it’s an occupancy-driven recovery, we’re beginning to add staff, especially hourly staff in the hotels to keep pace with the occupancy that’s happening. We’re still tight relative to management staffing and we’ll continue to be tight on management staffing, to the extent we can. The only other thing I would say in terms of costs and the implications going forward is that we have incorporated wage inflation this year. So we are giving merit increases, we’ve continued to give merit increases as we look into 2011. Bonuses have been reinstituted, and as results delivery expectations that’s going to happen. The one uncontrollable or two uncontrollable at this point of time, are heat, energy costs, and second is healthcare cost. We try and limit the increases to the extent we can. But those are the factors we bear in mind as we think forward relative to cost management both at the hotels and in corporate.”

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