Positions in Europe: Short France (EWQ)
Below we show a table of European Manufacturing PMI figures as reported from Markit/Reuters for November. The call-out here is that month-over-month the majority of reporting countries contracted, and are now firmly under the 50 line that divides contraction (below 50) and expansion (above). Russia and Italy saw a gain M/M, however Italy is decidedly in negative territory at 44. In an environment of elevated and inflationary commodity prices, we expect Russia to benefit. Oil and gas contribute to low 20% of GDP at these prices.
Our read-through on PMI figures is that they have further room to run on the downside and provide further evidence that growth expectations will need to come in even further over the next months. We think the performance of European capital markets will move based on the political decisions of Eurocrats; within the last months we attribute the negative trend to the inability of Eurocrats to present a credible plan on the key topics of expanding/leveraging the EFSF; a bank recapitalization contingency program; and Greek haircuts. Enhancing the downside risk is the Germany and ECB stance that the ECB will only be a lender of last resorts.
Below we show French Manufacturing and Services PMI (note: Nov. French Services will be released on 12/5). An interesting contribution from our internal meeting today came from our Financials sector head Josh Steiner. He noted that the assets of France’s three largest banks (SocGen, Credit Agricole, and BNP Paribas) represented 240% of French GDP, versus 57% for the US’s top three banks as a % of US GDP. This data point adds one more layer to our short position in France, which we’re currently playing in the Hedgeye Virtual Portfolio via EWQ.