Shorting the UK (EWU)

Positions in Europe: Short UK (EWU); Short EUR-USD (FXE)


Keith shorted the UK via the etf EWU in the Hedgeye Virtual Portfolio yesterday. Our thesis remains intact: the UK economy is in stagflation that should persist for at least the next two quarters in an optimistic scenario. Real growth should remain impaired from domestic austerity programs that weigh on confidence and spending, and sovereign debt contagion across continental Europe that enhances banking counterparty risks (think French and German banks as well) and a reduced appetite for UK goods and services considering Europe is its largest export partner.  Further, we’ve yet to see any meaningful improvement from the housing sector or elevated unemployment picture.

 

More specifically to our point on stagflation, GDP grew a mere +0.2% in Q2 quarter-over-quarter with Services sector growth at +0.5% slightly offsetting the -0.3% drag in Manufacturing. [July data also showed a notable inflection in the Manufacturing PMI to 49.1, or below the 50 line indicating contraction].  GDP grew +0.7% on a year-over-year basis, and we think 2011 growth could come in lower than +1.2% consensus.

 

While today’s Inflation Report from the BoE recognized growth challenges over the intermediate term, it stated that inflation, as measured by the CPI, should meet the BoE’s 2% target in 2012 and 2013. We’ll take the other side of this trade, and note there’s still just under five months left in 2011 and CPI has remained sticky above 4% year-to-date (currently at 4.2%), which will remain an added tax.  

 

The inflationary effect of energy costs give us pause, especially considering the country’s dependence on foreign sources. Further, looking at UK PPI as an indicator, we expect to see the pass-on effect of higher consumer prices (output costs) as input costs (materials and fuels) remain elevated (see chart below).  

 

In short, we see elevated inflation pressures and weak to negative growth prospects into year-end. We’ll short into that view. 

 

Shorting the UK (EWU) - 1. UKK

 

 

EUR-USD


As another piece of ammo to fight sovereign debt contagion across the region, the ECB announced today it will lend Eurozone banks €49.75 billion in emergency 6 month cash. While we don’t agree that concurrent bailout packages will stem all the fiscal imbalances across the region, we do think that these “band-aids” help give the common currency support. Additionally, bond yields have come in across the periphery since this weekend’s announcement of the resumption of the ECB’s SMP bond purchasing program.  While it’s by no means a foregone conclusion that yields will “normalize” over the near to intermediate term, especially given the uncertainty on the size and scope of the EFSF facility to be voted on in mid to late September, such measures could help give support to the EUR versus major currencies over the near term.  

 

Over the last four months we’ve outlined an immediate term TRADE range of $1.40 to $1.45 versus the USD, which has held strong. The pair continues to dance around our immediate term TREND of $1.43. Should both TRADE and TREND be violated to the downside, our quantitative models suggest the next line of support doesn’t come until $1.38.

 

Matthew Hedrick

Senior Analyst


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more