Buying Sweden

Positions in Europe: Long Sweden (EWD); Long Germany (EWG)

Conclusion: Swedish economic fundamentals remain strong (despite being off 2010 levels) and the Riksbank sends a clear message of interest rate tightening to head off inflation. We’re bullish on Sweden’s growth profile, sober fiscal policy, and sovereignty outside of the Eurozone.

We bought Sweden via the etf EWD on 8/9 in the Hedgeye Virtual Portfolio and despite the hit that most European country etfs have taken over recent days on incremental news of Italy’s sovereign debt concerns, we like owning Sweden for a few concise reasons:


GDP  – The country has a healthy growth profile of 4.5% this year. While off 2010’s growth rate of 5.4%, Sweden should continue to run a healthy trade surplus and find strong global export demand, especially considering that ~45% of its exports are destine to markets outside of the EU and therefore not tied to the region’s sovereign debt contagion threats. [For comparison, Eurozone 2011 GDP is estimated at 2.0%].


Interest Rates — The Riksbank has proactively raised the benchmark repo rate seven times since July ‘10  to combat inflation, in particular to cool the housing sector. While we haven’t ruled out another 25bp hike into year-end, at 2.00% the Bank has room to cut and maneuver around additional economic headwinds, should they arise.


Inflation  –  CPI stood at 3.1% in June Y/Y, above the 2.0% target rate, yet the strength of the SEK has helped mitigate imported price inflation, while the statistical office continues to report that domestic cost pressures remain low. As our Q2 theme of Deflation of the Inflation plays out, in particular for food and energy prices, we expect Swedish inflation to move closer to the target; CPI comparisons will also get more difficult as we move in the latter half of 2H2011, which should help to bring down the level.


SEK/Exports — The actions of the Riksbank have strengthen the SEK vs major currencies, and like the CHF, the SEK has provided a safe haven trade as the EUR remains mired in sovereign debt worries. [That said, the SEK has weakened versus the EUR and USD since early March ‘11 and early May ‘11, respectively. YTD the SEK-EUR is down -2.4% and the SEK-USD is up 2.3%].  In general we like the investment profile of a country with a strong currency. While a strong currency is a worry for exporting nations like Sweden, Swedish central bank Governor Stefan Ingves recently stated that the 22% surge in the Krona vs the USD over the past year marks a “normalization” that won’t harm exporters. [We’ve seen a similar positive outcome from Swiss exports despite a white hot CHF vs EUR and USD].


Unemployment – The unemployment rate stands at 7.9% in May, above the 6% level seen before the great recession, but below the Eurozone’s 9.9% or the US’s 9.2%. We think the rate made a top in January of this year and expect the rate to slowly trend lower into year-end.


Risk Metrics – Risk as assessed by sovereign CDS and bond yields is incredibly tame in Sweden, with 5YR Swedish CDS at 32.5bps (vs Germany at 54.3bps, or Greece, Portugal, and Ireland all above 1000bps!). The 10YR yield on Swedish government bonds is 2.686% (vs Germany at 2.711% or Greece, Portugal, and Ireland all over 12%!).  Debt as a percentage of GDP is 40% versus 79% in Germany and 144% in Greece. Finally the country is not running a budget deficit.



Headwinds Exist

Despite our bullish outlook on Sweden, it’s clear that growth and optimism are off levels seen in 2H2010. In particular, Sweden’s strong manufacturing sector has slowed, with PMI Manufacturing narrowing to 52.9 in June versus 56.1 in May and Consumer Confidence has dipped, falling to 16.7 in June versus 17.9 in May according to a survey from the National Institute of Economic Research.


Household Credit borrowing also deteriorated, falling to 6.9% in May Y/Y versus 7.2% in April and has trended lower year-to-date.   And Retail Sales have declined over the last two months, most recently at -1.1% in May Y/Y.


While we see an independent Swedish bank and currency as a positive, Sweden is not immune to Europe’s sovereign debt contagion, but perhaps just better sheltered. We’ll have to see how sentiment moves on the fiscal imbalances of Italy and Spain, economies far larger with far great banking counterparty exposure than Greece, Portugal, or Ireland.


Below we chart GDP, CPI, and the Riksbank Repo rate for reference.


Matthew Hedrick



Buying Sweden - 1. Sweden


Buying Sweden - 2. Sweden


Buying Sweden - 3. Sweden

More Signs of Margin Pressure

 More Signs of Margin Pressure - OTEXA July 2011  

OTEXA data out this morning supports our view on margins and outlook for the second half. The spread between producer costs and consumer prices continued to widen- short retail.


Notable news items and price action from the restaurant space as well as our fundamental view on select names.




Today the National Federation of Independent Business index fell from 90.9 to 90.8 for June (the fourth consecutive month of declines.  June’s decline brings the cumulative drop since March to 4 points. The details were mixed-to-poor as hiring plans rose but small-businesses turned more pessimistic on the economy’s prospects. Expectations for the economy to improve over the next six months rose fell sharply in June, declining from -5% to -11% and its worst showing since July 2010.


Also today, the ICSC chain store sales index continued to show strengthening consumer spending in early July. The ICSC chain store sales index has grown strongly in the last three weeks, with a 0.4% gain in the latest week coming on the heels of gains of 1.5% and 2.9%. Hot weather reportedly stimulated sales of seasonal merchandise, outweighing the drag from higher gasoline prices.


The inflation rate in France unexpectedly climbed to the highest in more than 2.5 years, +2.3% y/y, in June as costs for food, energy and services rose. Crude oil prices have jumped 26% over the past year, forcing French motorists to pay more for gasoline and sapping households’ disposable income.


Gasoline prices remain a significant constraint on consumer spending, and are moving in the wrong directions again. Prices were up $0.06 last week, taking the average price of unleaded gasoline to $3.70 per gallon. 




  • SBUX is rolling out Bistro Boxes today: small meals under 500 calories, such as Chipotle Chicken Wraps and Sesame Noodles, that cost less than $6.
  • MCD has introduced a new entrecote premium burger in Israel that is branded as the “Big America Series” which includes the Big New York and Big Texas hamburgers. Both will be sold for about $9.20 or $14.50 with fries and a beverage.  This is a low price-point in Israel versus boutique chains, according to Ynet News.
  • TAST was cut to “Outperform” at Raymond James.



  • BWLD was cut to “Market Perform” from “Outperform” at Raymond James.
  • RUTH was cut to “Market Perform” at Raymond James.





Howard Penney

Managing Director


Rory Green


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


TODAY’S S&P 500 SET-UP - July 12, 2011


If there's going to be a capitulation day this week, this should be it.  Alternatively, if Global Equity markets and European CDS don't arrest these abrupt moves soon, world markets are going to have a big problem. As we look at today’s set up for the S&P 500, the range is 39 points or -1.70% downside to 1297 and 0.64% upside to 1328.







THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -2168 (-996)  
  • VOLUME: NYSE 829.43 (+7.56%)
  • VIX:  18.39 +15.30 YTD PERFORMANCE: +3.61%
  • SPX PUT/CALL RATIO: 2.88 from 1.65 (+74.71%)



  • TED SPREAD: 22.57
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.94 from 3.03
  • YIELD CURVE: 2.57 from 2.63



  • 7:30 a.m.: NFIB Small Business Optimism, est. 91.2, prior 90.9
  • 8:30 a.m.: Trade balance, est. (-$44.1b)
  • 8:30 a.m.: USDA WASDE report
  • 10 a.m.: IBD/TIPP economic optimism, est. 43.9, prior 44.6
  • 10 a.m.: JOLTs job openings
  • 11:30 a.m.: U.S. to sell $28b in 4-wk bills
  • 12 p.m.: EIA short-term energy outlook
  • 1 p.m.: U.S. to sell $32b in 3-yr notes
  • 2 p.m.: Fed releases minutes from June 21-22 FOMC meeting
  • 4:30 p.m.: API weekly inventories


  • The Fed is scheduled to release minutes from the June 21-22 FOMC meeting at 2 p.m.
  • European finance ministers meet again today with plans to respond to release of bank stress tests later this week
  • Italian 10-yr yield rises above 6% for first time since 1997
  • President Barack Obama said to reject Republicans scaled- down deficit deal yesterday; talks continue today
  • Alcoa (AA) 2Q EPS cont ops 32c vs est. 33c




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Crude Oil Falls for a Third Day on European Debt Concern, U.S. Stockpiles
  • Gold Declines for First Day in Seven as Europe’s Debt Crisis Lifts Dollar
  • Copper Drops for a Third Day as Europe’s Sovereign-Debt Crisis May Broaden
  • ‘Double Eagle’ Gold Coin Dispute Harkens Back to Last U.S. Default in 1933
  • Cotton Falls to Nine-Month Low on China Demand Concern, Dollar’s Advance
  • Coffee Declines Amid European Sovereign-Debt Crisis Concern; Sugar Falls
  • Wheat Falls for a Second Day as ‘Risk-off Mood’ Engulfs Financial Markets
  • Rubber Drops for Fourth Day as European Debt Crisis Escalates, Oil Slumps
  • Cocoa Seen Advancing to New Highs on Africa-Indonesia Fix: Freight Markets
  • Oil Rebound Pushes Yields Lower Ahead of Record Debt Sale: Russia Credit
  • Zambia’s Copper Poised for Global Top 5 as Government Lures Vale, Vedanta
  • Corn, Soybean Cash Premiums Advance on Reduced U.S. Sales, Hot Weathert



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: oversold, but this is a bloody mess; Greece is crashing (down 31% since FEB making new YTD lows); Italians just making stuff up


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: worst day in 3 weeks; every market that matters = straight down; HK -3.1%, KOSPI -2.2%, India -1.8%, China -1.7%, Japan -1.4% 

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

SPR-ing the Consumer

This note was originally published at 8am on July 07, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

 “Yet for all its conflict and complexity, there has often been a “oneness” to the story of oil, a contemporary feel even to events that happened long ago and, simultaneously, profound echoes of the past in current and recent events.” 


-  Daniel Yergin, The Prize


Post World War II, global production of oil surged from 9 million barrels per day in 1945 to 40 million barrels per day in 1970.  Saudi Arabia and Iran were eager to monetize their vast resource potential – “Nobody could have lifted enough crude to satisfy all the governments in the Persian Gulf during this period,” said George Parkhurst of Standard Oil of California.  A wave of Soviet Union exports flooded the market; US Senator Kenneth Keating remarked, “It is now becoming increasingly evident that [Khrushchev] would also like to drown us in a sea of oil if we let him get away with it.”  In 1956, major oil companies struck oil in Algeria and Nigeria.  And in 1959 Standard Oil of New Jersey “hit the jack-pot” at the Zelten field in Libya. 


Consequently, the real price of oil sank 40 percent between 1960 and 1969.  Howard Page, Middle East Coordinator for Standard New Jersey said of the glut, “Oil was available for anybody, anytime, any place and always at a price as low as you were charging for it.”


In the late 1950s, President Eisenhower found himself in a precarious position.  Though the US was still the world’s largest oil producer, the plethora of cheap, foreign barrels encroached on the competitiveness of domestic, independent producers.  Oil imports rose from 15 percent of the domestic production equivalent to 19 percent between 1954 and 1957 alone.    


Congress urged Eisenhower, who morally opposed protectionism, to curb imports.  One geologist wrote to then-Senator Lyndon Johnson, “no sense in bankrupting every independent oil man in Texas for a few Arabian princes.”    Eisenhower resisted and criticized the “tendencies of special interests in the United States” that were “in conflict with the basic requirement on the United States to promote increased trade around the world.”  Begrudgingly, however, Ike caved, and on March 10, 1959 he signed into law a mandatory quota on imported oil equal to 9 percent of domestic consumption.


Eighteen months later, representatives from Saudi Arabia, Venezuela, Kuwait, Iraq, and Iran gathered in Baghdad.  The Organization of Petroleum Exporting Countries – OPEC – was established.  Market intervention certainly has its unintended consequences.  While I don’t assert that Eisenhower’s import quota was the sole motivating factor for OPEC’s birth or that OPEC would not exist absent the policy, it was of considerable influence.  In fact, Daniel Yergin, Pulitzer Prize winning author of The Prize: the Epic Quest for Oil, Money, and Power, called Eisenhower’s import controls “the single most important and influential American energy policy in the postwar years.”


“Profound echoes of the past” resonate in President Obama’s June 23rd decision to release 30 million barrels from the US’s Strategic Petroleum Reserve (SPR).  The attempted market intervention was (allegedly) prompted by the loss of Libyan supply and OPEC’s failure to officially raise production quotas in its most recent meeting.  Even though the contentious OPEC meeting failed to quell the IEA’s supply concerns, the Saudis were explicit in their intention to raise production by 1.5 million barrels per day regardless of the Iranian-lead OPEC decision – more than enough to replace the lost Libyan output.


Market participants quickly called out the IEA action for what it was: a haphazard attempt at price manipulation as global growth slows; after all, the agency’s press release stated: “Greater tightness in the oil market threatens to undermine the fragile global economic recovery.”  Thus, while Eisenhower sought higher oil prices to protect US producers from the actions of oil exporters, Obama seeks lower oil prices to shield US consumers from the same foes.


Geopolitical tensions in the Middle East have, of course, put a premium on crude oil; Brent – the world’s light, sweet benchmark grade – rallied from $102 per barrel to $114 per barrel in February alone.  But mention of US monetary policy is warranted in the oil price discussion.  After the Fed announced QE2 in late August 2010, oil prices moved 20% higher before you ever “Googled” a map of Tunisia.  The excessive liquidity injected into financial markets via the Fed’s bond-buying programs spurred investment into real assets, particularly across the commodity complex. 


And while Fed Chairman Ben Bernanke often cites stock market appreciation as evidence of QE’s success, he attributes commodity price inflation merely to “transitory” supply and demand fundamentals.  It would take a previously unforeseen level of accountability for Bernanke to admit that his policies are in part responsible for higher food and energy costs, while wages and employment are “frustratingly” stagnant. 


In his semiannual report to Congress on monetary policy earlier this year, Bernanke commented on rising oil prices: “We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability."  The traditional tools of monetary policy are interest rates, the monetary base, and reserve requirements; but does the Fed now sell oil too?  While Bernanke was likely consulted, no, he didn’t make that call.  Still, the Fed’s bond-buying program ended on June 30th and the US Department of Energy (DOE) was auctioning off emergency crude reserves the very next day.   Next up: the USDA will be planting corn in our national parks…


But what has been the impact of the SPR release thus far?  Well, Brent plummeted from $114 to $105 within two days of the announcement, though quickly recovered all of that loss.  The Brent futures curve went into contango for the blink of an eye before returning to backwardation.  The RBOB gasoline futures curve never budged and the front-month contract is now trading above its pre-SPR release price.  In the immediate-term, the oil market intervention did very little; on a longer duration, the IEA may have sparked the next leg up in the commodity. 


Most notably, the IEA’s decision to release reserves after the Saudis announced their intention to fill the Libyan supply shortfall calls into serious question Saudi Arabia’s spare capacity and oil quality.  Not only that, but eventually the IEA will have to enter the market as a buyer to refill the reserves; oil is not as easily produced as fiat currencies.  And the fact that the SPR auction was “substantially oversubscribed,” according to the DOE, does not suggest that the world’s largest energy companies believe oil prices are heading lower.


Government intervention in free markets often has unintended consequences, and, as a result, in the long-run consumers will realize an undesired outcome: higher oil prices.  For the only lasting impact that the IEA’s reserve release will have is that the agency’s greatest worry – inadequate supply – is more of a reality than the market previously thought.


The chart below outlines our TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less) quantitative setup for WTI crude oil. We will manage risk around these levels as government intervention inspires increased price volatility. We are currently short oil in our Virtual Portfolio as it is immediate-term TRADE overbought.


Our immediate-term support and resistance levels for oil, gold, and the SP500 are now $90.51-98.11, $1506-1532, and 1315-1360, respectively.


Kevin Kaiser



SPR-ing the Consumer - EL kaiser chart


SPR-ing the Consumer - Virtual Portfolio


The Macau Metro Monitor, July 12, 2011


NEVER SAY NEVER Inside Asian Gaming 

According to a IAG source, gazetting is not the only way to getting a casino.  "Land can be used for gaming if a letter of authorization to that effect is obtained from the DICJ (Macau's gaming regulator). My understanding is such a letter of authorization from the DICJ has been granted to the Macao Studio City (MSC) project some time ago," said the source.  The source cites Galaxy Starworld as a precedent of a gaming property sitting on non-gaming gazetted land.


IAG sources also say for gaming to be official (and a re-gazetting of MSC), MPEL needs to pay an additional land premium.  But don't expect any announcement from MPEL on the land use issue until they have gotten the necessary assurance from Macau's CEO Chui Sai On. 



In June, 633.9 BN yuan in new loans were issued, 3.4% higher YoY and +14.9% MoM.  This is significantly higher than a preliminary estimate of 500 BN for June by an unnamed source.  For 1H 2011, Chinese loans dropped 10% YoY to 4.17 TN yuan.



For June, the Great Singapore Sale (GSS) saw a rise in spending with MasterCard shoppers spending US$676.6 MM, +49% YoY.  The number of transaction also rose 28% to 4.7MM. 


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