The Economic Data calendar for the week of the 30th of January through the 3rd of February is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
We’re bullish on slots for CY2012 but the big short squeeze and WMS’s pulling forward of shipments has us cautious about the near-term outlook.
WMS reported an interesting quarter, one that the investors loved or at least liked enough to scare the shorts off the shorts. To be clear – all of the red flags that we raised before are still there. Those 957 new units that were deferred are a perfect example of trying to pull revenue forward. However, we actually raised our back half F12’ estimates – granted we were 20 cents below consensus to start with. We’re currently at $1.47 for FY2012 EPS.
Here are some quick takeaways from the quarter:
Positions in Europe: Short EUR/USD (FXE)
Asset Class Performance:
***When the equity markets of Cyprus, Romania, and Greece are leading performance year-to-date, the world’s markets are in a very perverse state. Our main question in the second half of this week was: is Greece’s equity performance attributable to inside information on the PSI deal getting done? We remain cautiously short the EUR-USD (more below) and extremely cautious on taking an investment position in Europe given the political risk of Eurocrats and various agencies (ISDA, IMF, and the big three Credit Ratings Agencies, to name a few). Another peculiarity of the week remains that sovereign CDS continues to trend higher as sovereign yields and the Euribor-OIS continue to come in. Portugal, however, bucked this trend with yields and CDS rising (more below). Advanced Manufacturing and Services PMIs looked better in January across the major economies and the major bond auctions across the region proved successful in meeting demand and issuance at lower yields. This coming Monday’s report of the ECB’s SMP bond buying last week may be telling (high).
Portugal On Uncertain Footing, Continued:
***This week saw a huge expansion of risk in Portugal in the form of rising CDS and sovereign yields. Growth, projected at -2.2% this year, will be a great challenge for the country as it runs the course of fiscal consolidation. We think there’s an outsized probability that Portugal misses its deficit target for a second straight year and its banks struggle to refinance and raise debt given its credit junk status.
Here are some contributing factors weighing on investors:
Carlos Moedas, Secretary of State to the Prime Minister of Portugal, presents an entirely different tone (one we find overly optimistic) on his outlook on Portugal in an article titled: Portugal Is Beating the Headwinds that was published in the WSJ on 1/26. See his comments here:
Pain in Spain, Continued:
This week two key Spanish Finance Ministers disagreed on the country’s deficit target. Economy Minister Luis de Guindos said Spain is sticking to its deficit goal even as the economy shrinks, whereas Budget Minister Cristobal Montoro’s called for the EU to ease Spain’s 4.4% of GDP deficit goal for 2012, as the figure was based on the previous government’s 2012 growth assumptions of +2.3% versus the Bank of Spain’s recent 2012 GDP estimate of -1.5%.
Spanish Prime Minister Mariano Rajoy affirmed this week that the target will be met. [Last year, the Spanish deficit amounting to 8% of GDP versus its target of 6%]. And EU Economic and Monetary Affairs Commissioner Olli Rehn rejected Montoro, said it’s “essential” that Spain meets the target.
Since Rajoy was elected on November 20th, the rate on 10-year Spanish debt has declined 159bps to 4.965%, however fundamentals don’t look rosy.
The unemployment rate stands at 22.9% in November and a housing overhang persists, preventing the market from clearing as banks remain reluctant to liquidate “troubled” assets that the Bank of Spain has estimated at €176B.
Last year house prices fell -8.2%, versus -17% since prices peaked in 1Q 2008. An issue that stands unanswered is if Rajoy will commit public funds to banks to bleed their “troubled” assets, a position he’s avoided as he focuses on bringing down the government’s deficit. According to an interview by de Guindos he’s “absolutely” ruled out setting up a so-called bad bank to acquire damaged assets from lenders, saying the cleanup process won’t “cost a penny more” to the taxpayer.
Merkel at the Pulpit and ESM vs EFSF:
***There’s been much talk this week about the permanent European Bailout Fund, named the European Stability Mechanism (ESM) that is effective July 2012 and currently stands at €500B. Italian Prime Minister Mario Monti said the ESM needs to be increased, whereas Merkel takes a more cautious tone on setting expectations and managing the “crisis”.
On calls to increase the size of the ESM, German Chancellor Merkel said, “Some say that it has to be double the size, then if that’s not big enough, others will say it has to be three times as big. What we don’t want is a situation in which we promise something that we can’t back up.” -Opening speech of Davos, 1/25/12.
On the direction to bind the Union, she said: "We will only be able to strengthen our common currency if we co-ordinate our policies more closely and are prepared to gradually give up more powers to the EU. If we make loads of promises about debt reduction and sound budgeting, those need to be things that can be enforced or brought to court in the future. The point of the fiscal compact, after all, is to make it possible to check on those commitments. That means giving our [European] institutions more monitoring rights – and more bite."
On Greece: “Of course, there's Greece, a special case where, despite all the efforts that have been made, neither the Greeks themselves nor the international community have yet managed to stabilize the situation."
On Eurobonds: Merkel again ruled out pooling Eurozone debt – Eurobonds – as a quick fix to the crisis, but left the option open should the new euro regime produce results. -Interview with The Guardian 1/25/12
Key Sovereign Bond Auction Prove Successful This Week:
PMI Manufacturing (Preliminary JAN):
France 48.5 JAN (exp. 48.6) vs 48.9 DEC
Germany 50.9 JAN (exp. 49) vs 48.4 DEC
Eurozone 48.7 JAN (exp. 47.3) vs 46.9 DEC
France 51.7 JAN (exp. 50) vs 50.3 DEC
Germany 54.5 JAN (exp 52.5) vs 52.4 DEC
Eurozone 50.5 JAN (exp. 49) vs 48.8 DEC
Key Regional Data This Week:
Germany GfK Consumer Confidence 5.9 FEB vs 5.7 JAN
Germany IFO Business Confidence 108.3 JAN vs 107.3 DEC
Germany IFO Current Assessment 116.3 JAN vs 116.7 DEC
Germany IFO Expectations 100.9 JAN vs 98.6 DEC
Germany Import Price Index 1.0% Q4 Y/Y vs 2.7% in Q3
France Business Confidence Indicator 91 JAN vs 94 DEC
UK Q4 GDP -0.2% Q/Q (exp. -0.1%) vs 0.6% Q3
Spain Unemployment Rate 22.9% in Q4 vs 22.2% estimate (highest level in 15 years)
CDS Risk Monitor:
***On a w/w basis, CDS was largely down across European sovereigns, with Portugal the exception for a second straight week. Italy saw the biggest declines at -62bps to 409bps, followed by Ireland -30bps to 623bps, and Spain -19bps to 362bps. Portugal gained +163bps (versus +169bps last week) to 1420bps (see charts below).
***Keith shorted the EUR/USD via the eft FXE on 1/19 in the Hedgeye Virtual Portfolio with the price bumping up against our immediate term TRADE resistance level of $1.29. We’ll be watching this position closely as our bullish outlook on the US Dollar greatly changed this week given the debauchery messages from President Obama (State of the Union Address) and Federal Reserve Chief Bernanke (FOMC Press Conference).
The European Week Ahead:
Monday: EU Summit; Jan. Eurozone Consumer Confidence - Final; Jan. Eurozone Business Climate Indicator; Jan. Eurozone Consumer, Economic, Industrial, and Services Confidence; Jan. Germany Consumer Price Index – Preliminary; Jan. UK GfK Consumer Confidence Survey; Jan. Italy Business Confidence; Q4 Spain, Ukraine, and Lithuania GDP – Preliminary
Tuesday: Dec. Eurozone Unemployment Rate; Jan. Germany Unemployment Rate and Change; Dec. UK Money Supply; Dec. France Producer Prices and Consumer Spending; 2011 Russia Annual GDP; Dec. Italy Unemployment Rate – Preliminary and PPI
Wednesday: Jan. Eurozone, Germany, and France PMI Manufacturing – Final; Eurozone Jan. CPI Estimate; Jan. UK House Prices and PMI Manufacturing
Thursday: Dec. Eurozone PPI; Jan. UK Lloyds Business Barometer; Dec. UK PMI Construction; Jan. Spain Unemployment
Friday: Jan. Eurozone PMI Composite and Services – Final; Dec. Eurozone Retail Sales; Jan. Germany and France PMI Services – Final; Jan. UK PMI Services and Official Reserves; Jan. Italy CPI – Preliminary and PMI Services
Extended Calendar Call-Outs:
16 February: Allegedly the “new” PSI deadline, but more practically, 20 March.
29 February: 2nd 36-Month LTRO Allotment
25-26 February: G20 Finance Ministers Meeting in Mexico City. Decision on IMF loan of €500B expected
20 March: Greece’s €14.5B Bond Redemption Due
30 June: Deadline for EU Banks to meet €106B capital target/the 9% Tier 1 capital ratio
1 July: ESM to come into force
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Macau stocks may face a headwind next week if expectations for a record month are not met.
This is the January Macau forecast from a brain: HK$23-25 billion
This is the January Macau forecast from a brain on drugs: HK$26-28 billion
Unfortunately, January expectations for Macau seem to have gotten a little ahead of likely reality. Of course, there is always the possiblity of crazy high hold during Chinese New Year (the reverse is also possible) but we don't believe January 2012 will be a monthly record. HK$24 billion is our point estimate which would still represent healthy 40% YoY growth off of an easy comparison. We've been consistently bullish about January, until now and only because expectations have risen and the stocks have soared.
We should be getting two weeks worth of revenue numbers on Monday which will come close to sealing the quarter. If consensus expectations are indeed for a record month, investors may be disappointing and the Macau stocks could be off to a tough start to the week. Of course, then we have to contend a February free of CNY, unlike last year.
THE HEDGEYE BREAKFAST MONITOR
SBUX: Starbucks reported a solid quarter after the close but failed to reach expectations. The stock is trading down -1.7% in pre-market trading despite having reported EPS of $0.50 versus consensus of $0.49. U.S. comps came in at 9%, which represented a sequential deceleration in two-year average trends. With coffee costs locked through 1HFY13 (March), the top-line is the key variable from here. Management raised the lower end of the FY12 EPS guidance range by $0.03 to $1.78-$1.82 but consensus is looking for $1.84. Despite the impressive statistics around consumer loyalty, K-Cup pack shipments, and progress in China, the Street’s expectations being ahead of the company is dictating price action this morning.
Comments from CEO Keith McCullough
The #BernankTax will be trending on a Twitter handle near you - that’s what a policy to inflate is:
Immediate-term TRADE range for the SP500 is now 1. I’m looking for a GDP miss vs heightened expectations at 830AM.
COSI: Cosi reported company-owned comparable restaurant sales of +0.9%.
YUM: Yum’s Taco Bell is starting a new breakfast menu in 10 western states and will begin to offer the menu in the east of the U.S. in 2013.
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
AFCE – up nicely following the preannouncement
KKD – up 8.5% in the past month and 9.8% YTD
CBOU – Hard to fight momentum with this stock in now up 23% YTD
CMG – 2/1 EPS date
WEN – Caught a downgrade this am 2/1 by UBS – good call ahead of the analyst day. We remain negative on TRADE
GMCR – The competition is heating up! Up 10% YTD
BJRI – nothing new
CAKE – surprise move here but should trade in line with the market into the 2/10 EPS
NOTABLE PERFORMANCE ON ACCELERATING VOLUME:
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