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Weekly European Monitor: Hobbling Along

No Current European Positions in the Hedgeye Virtual Portfolio

Asset Class Performance:

  • Equities: The worst country index performers w/w: Cyprus -10.7%; France -6.3%; Italy -5.9%; Spain -5.2%; Finland -5%; Germany -4.8%. Best performers w/w: Russia (RTSI) +1.2%; Hungary +0.1%; Ireland -50bps; Switzerland -100bps
  • FX: The EUR/USD fell -2.7% w/w. Divergences: RUB/EUR +1.2%; HUF/EUR: -90bps
  • Fixed Income: 10YR sovereign yields broadly declined w/w, led by Spain -75bps; Belgium -29bps; and Italy -20bps.  [We’ll be keying off this coming Monday’s ECB’s SMP weekly bond purchasing report for the prior week for insight into these waning yields.  Last week the SMP bought only €635M vs previous weeks in the low single digit billions of EUR – See our European Banking Monitor on Mondays for follow-up].

Weekly European Monitor: Hobbling Along - 1. yields



Call Outs:

The European week was dominated by three themes:


1.)    Credit Rating Agencies downgrades on Sovereigns and Banks post S&P’s CreditWatch Negative rating of 15 Eurozone countries on 12/5:

  1. (12/12) Moody’s says it will review its ratings of all EU sovereigns in Q1
  2. (12/14) Fitch cuts Credit Agricole 1 level to A+
  3. (12/15) Fitch cuts ratings of BNP Paribas (to A+ from AA-), Credit Suisse (to A from AA-), Deutsche Bank (to A from AA-), and Barclays (to A from AA-)
  4. (12/16) Fitch places Belgium, Spain, Italy, Ireland, Slovenia, Cyprus on rating watch negative 

Hedgeye’s Take: The three major credit ratings agencies are classic lagging indicators, yet their downgrades of sovereigns and banks will move the market.  We’ve long said that France will lose its AAA status.  Solving for how the EFSF, a facility built on its AAA credit status, will continue to raise money at favorable levels will be one more headwind for Eurocrats to address.



2.)    Lending disagreements on an additional €200B loan to the IMF from global central banks for troubled Eurozone states

  1. Legally Complex Problems - ECB President Draghi stated in his press conference on 12/8 that “given the spirit of [the EU] treaty, the ECB can’t channel money to circumvent the treaty.  If NSBs want to lend to the IMF, which would then lend to say China, that is fine. But if the IMF uses the money to buy bonds in Euroarea, this is not compatible with the treaty.”
  2. Increased push back from the US, Germany and the UK on contributions

Hedgeye’s Take: Even under a scenario in which €200 Billion was pledged by contributing members (which we think is highly improbable), it, along with €500B (across the EFSF and ESM) is far short of our $2-3 Trillion estimate to support Eurozone banks and sovereigns.  The Fiscal Union proposed in the 8-9 December Summit is far from the Bazooka the market is looking for to support intermediate term gains in capital markets.



3.)    Russia’s Cabinet Restructuring:

  1. (12/4) Putin’s United Russia wins a majority of 238 of the 450 seats in the parliament (Duma), but lost 77 seats, ahead of Presidential elections in March
  2. (12/10-11) 50k+ anti-Putin protesters over the weekend
  3. (12/12) Billionaire Mikhail Prokhorov announces he will challenge Putin
  4.  (12/14) Boris Gryzlov, the speaker of Russia's State Duma, the lower house of parliament, resigns. He was speaker since 2003 and a loyal ally of Putin’s

Hedgeye’s Take: It’s difficult to sift through where we’ll be in the next weeks and the ultimate outcome in a few months time.  Opinion seems very split with the extremes being A) Russia is having a ME moment (and Putin doesn’t have a chance at winning the Presidency) and B) Putin will rule with an iron fist for the next 12 years.  While the latter seems more likely to become reality, an important alternative view comes from Paul Starobin in that what we’re seeing is a “popular rejection of a strongman who has overstayed his welcome [Putin]—not a rejection of the model of strongman rule.”


The 50k demonstration over the weekend was impressive, nevertheless there’s no indication we’re at a tipping point yet.  Prokhorov entering the ring adds another element given his money, western know-how, and large public profile, however if Starobin is right that there’s no real support for Russian Liberalism, Prokhorov too doesn’t have a chance. (http://www.tnr.com/article/world/98370/post-putin-russia)


Further commentary worth noting:

  • Medvedev “is basically toast,” Jan Techau, director of the Brussels-based European center of the Carnegie Endowment for International Peace, said in a telephone interview.  “There’s no chance Medvedev will stay on as prime minister, but they can’t just discard him as a member of the inner circle and will find something nice and meaningless for him to do.”
  • Medvedev may resign before the end of the year, Otkritie Financial Corp. said in a note to clients.  That would allow Putin to become acting president and remain in power rather than resigning his post as premier in the run-up to the election, as required by Russian law, according to economists led by Vladimir Tikhomirov at the brokerage that is partly owned by state-run VTB Group, the country’s second-largest lender.

In a scenario of a Putin defeat, or defeat of a candidate backed by Putin, we think the risk of it being viewed as a destabilizing event is outsized…read global investors pulling out and Ruble weakness.  There are also many questions about just who is running the Finance Ministry.  Returning to the idea of the Ruble as the world’s reserve currency we think it is very improbable.  If any is to take over the USD, it’s the Yuan, but well off in the horizon.

Interestingly, the WTO announced today that it is set to accept Russia as a member after 18 years of negotiations.  



Interest Rate Decisions:

(12/14) Norges Bank Cut Benchmark Rate 50bps to 1.75%

(12/15) Switzerland SNB 3M Libor Target Rate UNCH at 0.00%


Chart of the Week:

-We’d caution against getting overly optimistic about the one month positive inflection in the 6M forward looking German ZEW Economic Sentiment number for December.  Germany’s largest trading partners remain its European neighbors – so as long as the region is mired in this sovereign debt and banking crisis, trade will continue to contract.  Germany’s growth outlook may simply be the best of a decidedly contractionary group in 2012.


Weekly European Monitor: Hobbling Along - 1. GERMANY ZEW



CDS Risk Monitor:

-On a w/w basis, CDS was largely flat across the periphery.  Spain saw the largest pullback at -26bps.  On a m/m basis, Spanish CDS is down 52bps and Italian CDS is down 37bps.


Weekly European Monitor: Hobbling Along - 1. cds a


Weekly European Monitor: Hobbling Along - 1. cds b


Data - The West:

-Dec flash PMIs of Services and Manufacturing came in better than expected, and largely improved M/M, yet remain at or below the 50 line that divides contraction (below 50) and expansion (above).


Weekly European Monitor: Hobbling Along - 1. Manu


Weekly European Monitor: Hobbling Along - 1. Services


Eurozone Composite 47.9 DEC vs 47.0 NOV

Eurozone CPI was unch at 3.0% NOV Y/Y vs the previous month



Data - The East:

-ZEW released its December market survey for Eastern Europe (EE).  We key off of the 6-month forward looking “Economic Expectations”.  Of note is that EE will be held hostage to:

  • Weak trade demand from Western Europe (WE)
  • Foreign currency loan leverage, in particular to the CHF and EUR, especially as domestic currencies are under pressure

Weekly European Monitor: Hobbling Along - EE ZEW



Polish Zloty -12.0%

Hungarian Forint -8.4%



Polish Zloty -13.6%

Hungarian Forint -10.0%

Romania Leu -2.7%

Czech Koruna -2.5%


-Alternative View: Could EE and its currencies benefit from capital flows exiting the US and China?




-We’d short the cross at $1.33 for an immediate term TRADE.  The EUR/USD remains broken long term TAIL ($1.40) and intermediate term TREND ($1.42) in our models and we think the lack of resolve from the newest proposals for a fiscal union will encourage greater downside. 



The European Week Ahead:


Monday: Oct. Eurozone Current Account; Dec. UK GfK Consumer Confidence Survey


Tuesday: Jan. German GfK Consumer Confidence Survey; Oct. Greek Current Account; Riksbank Interest Rate Announcement


Wednesday: Nov. Dec. Eurozone Consumer Confidence; Bank of England Minutes Released; Q3 Italian GDP


Thursday: Q3 UK GDP and Current Account; Q3 Denmark and Netherlands GDP


Friday: Q3 France GDP and Producer Prices; Dec. Russian Money Supply



Matthew Hedrick
Senior Analyst 


In November, YoY CPI growth for Food at Home decreased by 30 basis points to +5.9% from 6.2% in October.  CPI for Food Away from Home gained 20 basis points to +2.9% from +2.7% in October.


We will be watching this trend carefully as it would be a negative for restaurants, on the margin, if grocery inflation were to come down closer to the level of inflation being seen in restaurant checks.  Restaurant margins have been under pressure from increased food costs, as evidenced by Darden’s Olive Garden chain in the most recently reported quarter (2QFY12). 


Malcolm Knapp’s Knapp Track data suggested a slowdown in November across the industry and, we would argue that while that may have been unrelated to the narrowing in the spread between CPI for Food at Home and CPI for Food Away from Home, a continuation of this trend would not be a positive for restaurant trends.   Despite falling food costs, inventories need to be exhausted and contracts need to be worked through before the benefit of lower costs hits the P&Ls. 


CPI – NOV FOOD AT HOME SLOWS AS AWAY FROM HOME ACCELERATES - food at home vs food away from home cpi



Howard Penney

Managing Director


Rory Green












The Consumer Price Index for November came in at +3.4% y/y versus expectations of +3.5%. CPI Ex Food & Energy came in at +0.2% versus expectations of +0.1%. We will have a post up this morning with more pertinent takeaways.


Comments from CEO Keith McCullough


Buy low, sell high – I really think that idea could be back in 2012.

  1. GOLD – Most Read on Bloomberg this morning is “Gold Market Rout Leaves Traders Least Bullish in 4 months” – gee, thanks. This is a great contrarian signal when combined w/ my long-term TAIL of support for Gold holding at $1568 (bought it there on 12/14). We’re not free and clear in this position obviously for a while; but getting above $1596 would help – that’s an impt level of immediate-term resistance
  2. INDIA – good news in Asia overnight was that China stopped going down for a day (+2%); bad news is that the Shanghai Comp remains in crash mode and the Sensex in India continues to crash (down another -2.2% overnight, taking YTD crash to -24.5%); Brent Oil at $115/barrel in November did not help India
  3. GERMANY – Commerzbank and Deutsche Bank solvency problems finally becoming understood; this should help the Street recognize why the Germans will take care of the German banks before they do French ones. As we’ve outlined in our European bank slide presentation for the last 6 months, the list of insolvent European banks is long and the mechanism to bail the list out is not in place. New DAX range = 5 (bearish)


SP500 holding 1206 is constructive. Strong Dollar = Strong American Consumption and Employment.






THE HBM: DPZ, BWLD, DRI, MRT - subsector fbr





DPZ: The Al Jammaz family, owners of Domino’s Pizza operator, Alamar Foods, which operates Wendy’s and Domino’s Pizza restaurants in the Middle East, sold a 42% stake in Alamar to The Carlyle Group. 





BWLD: Buffalo Wild Wings was raised to “Buy” at Miller Tabak & Co.  The twelve month price target is $78.  We have not seen the report but have strong conviction that this stock will underperform over the next couple of quarters.  We believe there is downside to $45.


DRI: Darden Restaurants reported 2QFY12 EPS of $0.41, as previously announced on December 6th. 


MRT: Morton’s Restaurant Group is being bought by Tilman Fertitta, owner of Landry’s Restaurants Inc. in a deal that values the steak-house company at $117 million or $6.90 per share.


THE HBM: DPZ, BWLD, DRI, MRT - stocks 1216



Howard Penney

Managing Director


Rory Green



Early Look

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Time and Price

This note was originally published at 8am on December 13, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The only reason for time is so that everything doesn’t happen at once.”

-Albert Einstein


Intraday yesterday we made another “Short Covering Opportunity” call. It was no different than any of the other short covering calls we’ve made in 2011 (August 8th, September 12th, October 4th). It’s what we do. Timing matters.


Immediately after making the call our Sales Desk and tweet-machines lit up like a Christmas tree with questions that weren’t all the same – but they certainly rhymed: “but what’s changed”… “why here”… “what’s the catalyst”… etc.


The summary answer to all of the questions is that nothing in our risk management process changed – time and price did. With a long SP500 (SPY) position, a 12% asset allocation to US Equities, and 10 LONGS vs 4 SHORTS in the Hedgeye Portfolio, this is the most bullish position I have taken in all of November-December (that’s a good thing – the SP500 is down for both months).


Back to the Global Macro Grind


If you go all the way back to a week ago today, our Senior Analyst of European research, Matt Hedrick, and I were making an explicit call to short Global Equities and Commodities into the EU Summit. Long live King Dollar (UUP) versus the Euro (FXE) was implied.


On two separate occasions (last Tuesday and Wednesday) you had an opportunity to sell SP500 1265-1268. Maybe you didn’t top tick it, but hopefully you cut your gross and net exposures up there because I can assure you that in the world of your own money, a -3% drawdown of your capital (from 1268 to yesterday’s lows of 1229) matters.


Now some people throw their arms up in the air and say, ‘well, I can’t manage that type of a move’ or ‘I’m too big to make those types of decisions that quickly’ – and I hear and respect where they are coming from. But that doesn’t mean that other people can’t.


Yes We Can.


Managing your gross and net exposure within a band of 300 basis points of risk (3%) is very achievable if A) you have a Global Macro research process and B) you have the catalysts right.


Sometimes catalysts like the EU Summit are scheduled events. Sometimes the catalyst is simply time and price. You need a process to absorb both.


Why did I buy the SP500 (SPY) yesterday?

  1. My immediate-term TRADE line of SP500 support (1232) held
  2. My immediate-term TRADE line of VIX resistance (27.78) held
  3. My immediate-term range of risk collapsed to 37 SP500 points wide (vs 77 on the day prior)

Those first two points are easy to understand. US Equities (SPY) and Volatility (VIX) are inversely correlated on the order of -0.7 right now and of the many factoring relationships in our model, that’s one of the most important ones to consider.


Volatility is also one of the most misunderstood risk factors in all of portfolio construction. In many instances it’s a coincident to lagging indicator – in some instances it’s a leading indicator. That’s why it drives people nuts. That’s why I have built a model to front-run my own volatility signals.


Front-running? Bad word – if you run a brokerage like Corzine did. Good idea if you want to get ahead of the robots that are making decisions in real-time. If you didn’t know that they chase beta, now you know.


Most of you who have dialed into our Morning Call (every morning at 830AM EST – ask sales@hedgeye.com for access) know that I front-run my Volatility range using a ‘range of risk’ model that calculates the probability of the next move in both volatility and price.


What does that mean?

  1. If my range is compressing (ie from 77 points wide to 37 points), the implied risk of the range is going down (= BUY)
  2. If my range is widening (ie from 37 points wide 145 points wide where it was last Tuesday), implied risk goes up (= SELL)

To be clear, my ‘range’ signal is one of the many signals I consider before making any exposure, asset allocation, or position decision. Remember, Multi-Factor and Multi-Duration is how we roll.


Not unlike seeing a play develop on the ice, time and patterns are omnipresent. As opposed to the time and space a hockey player needs to consider in making a short-term decision, solving for time and price risk in markets is what can make for a longer-term career.


My immediate-term support and resistance ranges for Gold (bearish TRADE and TREND), Brent Oil (Bearish TRADE, TREND, and TAIL), and the SP500 (bullish TRADE; bearish TAIL) are now $1664-1728, $107.12-109.29, and 1232-1248. On a move back towards 1248, I’ll likely do the opposite of what I did yesterday. Time and price pending.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Time and Price - Chart of the Day


Time and Price - Virtual Portfolio


As you can see I know have PFCB front and center on my radar screen.  I don't want to miss this one.


The P.F. Chang’s at the Irvine Spectrum, has been scrapped and rebuilt with the thought that they wanted the interior not to resemble a traditional P.F. Changs’s but rather feel like an independent restaurant.  The menu has also been revamped, is more innovative, and may offer the company a way to improve the top line. 


It’s dubbed the Irvine Learning Laboratory because it is just that – the company is experimenting with a new menu that has a Pan-Asian theme.  The success of new menu items can be gauged as the chain aims to find new dishes that will appeal to customers across the system.  This is the first step in bringing new life to the current P.F. Chang’s menu.


Below are pictures of the new store in Irvine and some food prepared in the restaurant.








Howard Penney

Managing Director


Rory Green






Keith shorted PENN in the Hedgeye Virtual Portfolio at $35.84.  According to his model, there is TRADE and TREND resistance at $36.34 and $37.93 respectively.  



We're currently below the Street with our Q4 EBITDA and revenue estimates.  It's been awhile since PENN missed a quarter.


Following a tough October, the picture for regional gaming has been mixed in November.  While Missouri and Iowa (same-store) revenues were modestly higher YoY, Illinois (same-store), Indiana, Louisiana posted lower revenues and missed seasonal expectations badly.  We track monthly sequential revenue based on the previous 3 months, adjusted by historical seasonality factors.  Many of PENN's casinos operate in the difficult markets and PENN continues to lose market share in Illinois.  In addition, growth in the newer growth markets (Pennsylvania, West Virginia, Maryland) have been lackluster so far in Q4.  December contains one extra Saturday compared with last year but comps are difficult.



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