Weekly European Monitor: Ach Ja

Positions in Europe: Short EUR/USD (FXE)


Asset Class Performance:

  • Equities:  European indices were up across the board for a third straight week, with a strong outperformance from Eastern Europe week-over-week.  Top performers: Denmark 7.7%; Russia (RTSI) 5.4%; Ukraine 5.1%; Romania 5.0%; and the Czech Republic 4.3%. Bottom performers: Cyprus -2.1%; Slovakia -2.0%.
  • FX:  The EUR/USD -0.6% week-over-week. Divergences: PLN/EUR +1.3%, HUF/EUR +0.9%, CZK/EUR +0.7%
  • Fixed Income:  10YR sovereign yields broadly decreased w/w, with Portugal leading the charge, down -57bps to 14.3%.

Weekly European Monitor: Ach Ja - 11. yields



In Review:

***Ach Ja… So where have we really gone in the last week?  We saw another strong week-over-week performance across the region’s equity markets, had another week of indecision on Greek PSI, and saw headline risk rule capital market daily performance—not unlike many days in the last two years. Portuguese risk appeared front and center early in the week (see why in last week’s Monitor), pushing yields on the 10YR up to as high as 17.4% on Monday after which the yield moderated -300bps. There’s increased “hope” in the LTRO, include the second 36M allotment to be issued on February 29th, and bullish sentiment around the fiscal compact that is to be signed on March 1-2 (more below). We think the market may be overly bullish on both events.


While the LTRO will provide needed liquidity, we’ve yet to see data indicating lending upticks (much is still being parked overnight with the ECB), and banks still have a long way to go to write down assets and raise capital into the July 1st deadline. To the fiscal compact we maintain that countries will not give up their sovereignty to Brussels (or Berlin), which will leave the underfunded EFSF + ESM facilities vulnerable. We saw evidence of the sovereignty issue early in the week with Germany floating the idea of establishing a budget overseer to have strict control and veto power over Greece’s fiscal policy decisions going forward (tantamount to the fiscal compact) in return for bailout funds. Greece’s Finance Minister Venizelos adamantly rejected this plan and warned that “anyone who puts a nation before the dilemma of economic assistance or national dignity ignores some key historical lessons.” 


We’d expect fits of optimism follow by selling pressures across equity markets, not unlike our outlook for the EUR/USD that may be range bound until we see any material policy moves to initiate an inflection. The ECB’s SMP bond purchasing program remains an important indicator. Surprisingly there was very little buying last week (€63MM) despite very positive bond auctions across key peripheral countries. We saw a similar trend of successful auctions this week, which will make Monday’s data critical. Could the SMP in fact be stepping back? Are banks picking up the slack? We’re not convinced on either front.  


Data this week showed an uptick in Services and Manufacturing PMIs across most countries, with Ireland showing a negative divergence. While Eurozone inflation has come in, unemployment remains sticky at 10.4% [of course considerably higher across the periphery and for the youth (between to 20-50%)], and fiscal consolidation is taking its toll on confidence, spending, and more broadly economic output. We expect the BOE to increase asset purchases (between 50-75B GBP) to mitigate some of the blow the economy has taken when it meets on Thursday. Conversely, data out of Germany continue to be positive, which has helped propel the DAX to 14.7% year-to-date and yields on its 10YR around 1.83%. 


Call Outs:

  • A Greece government official said that talks with the troika are basically completed but a few sticking points remain centered around wages, supplementary pensions and the recapitalization of banks. There was talk that a PSI deal was close and the latest terms being floated call for a 72% haircut, 3.6% coupon + GDP warrant, and no ECB participation. Nothing is official yet, but a statement is expected for Monday. 
  • Spain gives banks an extra year to recognize losses if they agree to merge with other lenders. (lenders have ~ €175 billion of troubled real-estate assets.)
    • 1 year to make €50 billion of provisions against real-estate assets.
    • If they agree by the end of May to merge, they get a further 12 months to take the charges and can tap the state’s bank-bailout facility for funds.
    • The government will make banks increase the ratio of provisions set aside for land to 80 percent from 31 percent, de Guindos said. For unfinished developments, the provisioning level will rise to 65% from 27% and to 35% for assets including finished developments and houses.

Key European Data:

Eurozone CPI Estimate 2.7% JAN Y/Y vs 2.7% DEC

Eurozone Unemployment Rate 10.4% DEC vs 10.4% NOV

Eurozone PPI 4.3% DEC Y/Y (exp. 4.3%) vs 5.4% NOV     [-0.2% DEC M/M vs 0.2%]

Eurozone Retail Sales -1.6% DEC Y/Y (exp. -1.3%) vs -1.5% NOV    [-0.4% DEC M/M (exp. 0.3%) vs -0.4%]


Manufacturing PMI (JAN vs DEC):

 France 48.5 vs 48.9

Germany 51 vs 48.4

Eurozone 48.8 vs 46.9

UK 52.1 vs 49.7 (exp. 50)

Italy 46.8 vs 44.3  (exp. 45.3)

Denmark 54.3 vs 59.4

Russia 50.8 vs 51.6

Ireland 48.3 vs 48.6

Sweden  51.4 vs 48.9 (exp. 49.5)

Hungary 49.8 vs 48.6

Poland 52.2 vs 48.8

Turkey 51.7 vs 52.0

Norway 54.9 vs 46.6 (exp. 48)

Spain 45.1 vs 43.7

Czech Republic 48.8 vs 49.2

Switzerland 47.3 vs 49.1 (exp. 51.2)


PMI Services (JAN vs DEC):

Eurozone 50.4 JAN F (exp. 50.5) vs 48.8 DEC

Germany 53.7 JAN F (exp. 54.5) vs 52.4 DEC

France 52.3 JAN F (exp. 51.7) vs 50.3 DEC

UK 56 (exp. 53.3) vs 54

Italy 44.8 JAN (exp. 45.4) vs 44.5 DEC

Russia 56.5 vs 53.8

Ireland 48.3 vs 48.4

Spain 46.1 vs 42.1


Eurozone Composite 50.4 JAN F (exp. 50.4) vs 48.3 DEC


Positives (+)

Eurozone Business Climate Indicator -0.21 JAN (exp. -0.25) vs -0.32 DEC

Eurozone Consumer Confidence -20.7 JAN FINAL (exp. -20.6) vs -21.3 DEC

Eurozone Economic Confidence 93.4 JAN (exp. 93.8) vs 92.8 DEC

Eurozone Industrial Confidence -7.2 JAN (exp. -6.8) vs -7.2 DEC

Eurozone Services Confidence -0.6 JAN (exp. -1.6) vs -2.6 DEC

Germany Unemployment Rate 6.7% JAN (exp. 6.8%) vs 6.8% DEC

Germany Unemployment Chg -34K JAN (steepest decline since Mar 2011 to 2.85 million)  vs -25K DEC


Negatives (-) 

Spain Q4 GDP 0.3% Y/Y vs 0.8% in Q3    [ -0.3% Q/Q (exp. -0.3%) vs 0.0% in Q3]

Italy Business Confidence 92.1 JAN vs 92.5 DEC



(2/2) Romania Interest Rate CUT 25bps to 5.50%

(2/2) Czech Repo Rate UNCH at 0.75%

(2/3) Russia Overnight Deposit Rate UNCH at 4.00%

Russia Overnight Auction-Based Repo UNCH at 5.25%

Russia Refinancing Rate UNCH at 8.00%


CDS Risk Monitor:

On a w/w basis, CDS was largely down across European sovereigns, with Portugal leading the charge, down -87bps to 1,333bps. Ireland saw the next largest drop at -40bps to 583bps (see charts below).   


Weekly European Monitor: Ach Ja - 11. cds a


Weekly European Monitor: Ach Ja - 11. cds b



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. This is a position we’re monitoring closely given the extreme headline risk moving the pair.  


Weekly European Monitor: Ach Ja - 11. EUR



Fiscal Compact:

Below we’ve copied the main points issued from Monday’s EU Summit concerning the fiscal compact. The full issue can be found here:


First: we agreed and endorsed the fiscal compact, a treaty on stability and convergence in

the Economic and Monetary Union. The 17 euro leaders will sign it at our next meeting in

March (1-2), together with the non-euro area leaders of countries willing to join. The Treaty is

all about more responsibility and better surveillance. Every country that signs it commits to

bringing in a "debt brake" or "golden rule" into its own legislation, and will do so at

constitutional or equivalent level. New voting rules and an automatic correction

mechanism will enforce compliance more effectively. 25 Member States will sign it, that is

all except the UK and the Czech Republic. The treaty will enter into force once 12 euro

countries have ratified it. 


Secondly: we endorsed the agreement between the 17 on the Treaty for the European

Stability Mechanism. We call on Finance Ministers to sign it at the next Eurogroup

Meeting (Feb 29th?), so that it can take effect from July 2012. The early entry into force of this

permanent firewall will prevent contagion in the euro area and further restore confidence.


Thirdly: as agreed in December, we will reassess the adequacy of resources under the

EFSF and ESM rescue funds in March. -- And since our next summit is on the 1st of

March, this is actually less than 5 weeks from now!


Fourth and last element: concerning Greece, we welcome the progress made in the

negotiations with the private sector. We call on the Greek authorities and the troika to

agree on the steps to put the current programme back on track. We urge Finance Ministers

to take all necessary actions to implement the private sector involvement agreement and to

adopt the new programme by the end of the week, well in time for the launching of the

'PSI' by mid-February.  


Final point: Although it was not formally on the agenda today, we also briefly touched

upon foreign relations. I have issued a separate press statement on this, so let me just

mention the three topics we discussed. We endorsed the restrictive measures against Iran,

including an oil embargo, as decided by the Foreign Ministers last week. We expressed our

outrage at the atrocities and repression committed by the Syrian regime, and urged the

members of the UN Security Council to take long overdue steps to bring an end to the




The European Week Ahead:

Sunday:  Jan. UK Lloyds Employment Confidence


Monday:  Feb. Eurozone Sentix Investor Confidence; Dec. Germany Factory Orders; Jan. UK BRS Sales Like-For-Like and New Car Registrations; Jan. Russia Consumer Prices and Core Inflation


Tuesday:  Jan. Germany Wholesale Price Index (Feb 7-12); Dec. Germany Industrial Production; Jan. UK BRC Shop Price Index; Dec. France and Russia Trade Balance


Wednesday:  Dec. Germany Current Account, Trade Balance, Exports, and Imports; Jan. France Business Sentiment and Budget Balance; Iceland Interest Rate Announcement


Thursday:  Eurozone Policy Meeting and Interest Rates Announcement; UK Interest Rates Announcement and Asset Purchase Target; Jan. UK GDP Estimate; Dec. UK Industrial and Manufacturing Production, Trade Balance; France Survey of Industrial Investments; Jan. Russia Budget Balance (Feb 9-13); Nov. Greece Unemployment Rate


Friday:  Jan. Germany Consumer Price Index – Final; Jan. UK PPI Input and Output; Dec. France Current Account, Manufacturing and Industrial Production; Dec. Italy Industrial Production



Extended Calendar Call-Outs:

16 February:  Allegedly the “new” PSI deadline

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 €14.5 Billion Bond Redemption Due

30 June:  Deadline for EU Banks to meet €106 Billion capital target/the 9% Tier 1 capital ratio

1 July:  ESM to come into force


Matthew Hedrick

Senior Analyst


We expect QSR to continue to reap the benefits of strong employment trends among young people.  Older cohorts also showed strength in January employment data.


While the 10-24 and 24-34 years of age cohorts saw sequential deceleration in year-over-year employment growth, the employment report was generally positive for restaurant companies.  Specifically, the 35-44 and 45-54 years of age cohorts saw employment levels rise year-over-year for the first time since before the recession.  55-64 year olds’ employment level gained 5.1% year-over-year.  The sequential deceleration in the younger cohorts is not a huge concern to us at this point, and we expect QSR to continue to gain from the positive employment news.  Casual dining is also likely to benefit from the improvement in older cohorts, in particular, as well as from overall employment gains.  Casual dining is trading well today: DIN, EAT, BWLD, DRI and others all up. 




Hiring trends in the restaurant industry remain strong as of December.  See the chart below to view the longer term trend.


EMPLOYMENT DATA UPDATE - restaurant employment



Howard Penney

Managing Director


Rory Green


Finding Nemo: Key Takeaways from the Bloomberg China Conference

Conclusion: Anything but conclusive.


Virtual Portfolio Positioning: Long Chinese equities.


On Wednesday, we had the great pleasure of joining well over a hundred distinguished investment professionals at the New York Academy of Sciences for the Bloomberg China Conference. All told, there were 13 unique discussions on various topics ranging from China’s economic outlook to its real estate market to the opportunities/challenges facing China’s growing consumer sector.


Before we share with you the “best of” version of our notes, we just wanted to briefly reflect upon something that struck me us quite odd: with the exception of NYU professor Ann Lee, none of the 28 panelists were: a) from China or b) Chinese-Americans with valuable connections to the mainland. In fact, the vast majority of the seven-plus hours of discussion centered on the opinions and beliefs of American PMs, professors, and policymakers. Not that this is an issue prima facie – as each of presenters was highly accomplished, well-deserving, and thoughtful – but the general lack of Chinese voices on issues pertaining specifically to China is particularly bizarre in our opinion.


That speaks volumes to what we thought were my two greatest learning points from yesterday’s conference:

  1. While the general tone is grounded in apprehension, there is no discernable consensus on China. In fact, China appears to be a very difficult economy to reach consensus on because so much of what takes place there is just fundamentally misaligned with the patterns we've been trained to recognize through studying other economies; and
  2. It's clear that U.S. based investors analyze China from a far too Western point of view, imposing potential avenues for reform and structural economic changes that would ultimately serve China to become more like us. But does China want to be more like the U.S.? There was a sense that perhaps the speakers knew all too well what was best for China – perhaps even more so than the Chinese…


Below is a collection of paraphrased notes that we found helpful to expanding the scope of our own internal debates regarding the world’s second-largest economy (sorted by topic of discussion):

    • Francisco Blanch: There aren’t enough natural resources or additional scope for productivity gains to keep China growing at +8-10% per annum. The law of large numbers would tend to support this conclusion as well.
    • Daniel Rosen: There’s trillions of dollars in low-hanging fruit the Chinese government can spend to support near-to-intermediate term growth: building schools and hospitals, social safety net expansion, etc.
    • Axel Merk: High net worth individuals in China own 3.3 residential real estate properties on average. Most go unrented, as maintenance costs dramatically outpace any potential rental yields.
    • Michael Shaoul: The utility of real estate in China has changed from “shelter” to “speculation”.
    • Sonny Kalsi/Bhaskar Chakravorti: The median home price in China is 20x the median income – more than double the U.S. ratio. That said, however, there is very little in the direction of low-income, commodity housing in China; as such, a great deal of the homes that are being quoted for prices aren’t exactly being marketed to the median consumer. Thus, household affordability isn’t quite as poor as the headline metrics suggest.
    • Bhaskar Chakravorti: Commercial real estate – particularly high-end retail and hotels – is in oversupply across many municipalities in China, due to the incentive of mayors to seek rent-paying tenants. Thus, a nationwide residential property tax might actually return the supply side of the market towards equilibrium as those distortions are mitigated.
    • Axel Merk: The PBOC’s regulation of the cost of credit throughout the economy limits the supply of credit that is available to less creditworthy borrowers, such as small-to-medium-sized enterprises (SMEs).
    • Axel Merk: Cheap credit isn’t necessary to get/keep an economy going. What economies need, rather, is a market-based system for pricing of risk. Financial repression actually slows growth in the velocity of money, as certain borrowers are crowded out of the credit markets.
    • Michael Shaoul: The demand for real estate investment leads the demand for credit in China.
    • Michael Shaoul: Since 2007, the Hang Seng Financial Index overlays quite well with the equity prices of Japanese banks in the four years post 1989.
    • Joseph Taylor: The deposit rate ceiling acts as a subsidy to the state banks. Thus, the #1 problem with removing the floor is that [largely] unprofitable state-owned-enterprises (SOEs) will see their weighted average cost of capital increase as bank funding costs rise.
    • Daniel Rosen: The Chinese consumer is stronger than meets the eye. Since 2003, nominal household consumption has doubled; there’s $500B-$1T in “grey consumption” (i.e. large propensity to spend abroad, unrecorded cash transactions, etc.); and Chinese consumption has grown faster, in real terms, than any other economy over the previous decade.
    • Daniel Rosen: China desperately needs to further develop consumer vs. producer rights and establish intellectual property guidelines to reach a higher plateau of value-added consumption.
    • Daniel Rosen: China must embrace regulatory reform in order to expand the market for higher-wage, white collar labor.
    • Robert Kapp: The RMB can’t ever become a free-floating currency without first liberalizing interest rates – which are ultimately a function of the liberalization of cross-border capital flows.
    • David Rubenstein: The U.S. invests about 5x as much money in China as the Chinese do in the U.S.
    • Robert Kapp: Many Chinese investors are cynical towards their investment opportunities in the U.S. due to political resistance at the federal level, thus limiting the two-way flow of both foreign and portfolio direct investment. On the State and municipal level, however, many U.S. governors and mayors are welcoming of Chinese capital with open arms.
    • Robert Hormats: Intellectual property is an enormous problem in China. For example, to establish a joint venture in China – which is key form of FDI – a multi-national corporation essentially has to give away any/all its R&D and intellectual property, which ultimately gets pirated by “competitors”.
  • CHINA vs. U.S.
    • Robert Kapp: As China grows larger in economic and military might, it will seek to impose its own set of rules upon multinational organizations and international best practices. That said, Chinese international agents are very well aware of how certain systems benefit them and will no doubt seek to uphold those structures.
    • Robert Kapp: Chinese policymakers are aware that it is in their best interest to keep the peace on the geopolitical risk front. Furthermore, there are certain stances that they are likely to ultimately choose to not defend – such as sanctions on Iran – if the alternative was to engage in international military conflict.
    • Consensus among panelists: 2012 will be the “year of the status quo”, as China will seek to avoid any major changes ahead of or shortly after “handing off the baton” to the new leadership.
    • Tim Adams: It would be surprising to see aggressive monetary easing in 2012. In fact, as Beijing has alluded to the entire way down, the State Council’s goal is to take the air out of the real estate industry. Further, they wouldn’t mind seeing consolidation in the over-supplied property development sector.
    • Robert Kapp: The economic/market liberalizing reforms of the last 20-30yrs have essentially ground to a halt. It’s unlikely that China reaccelerates the pace towards Western-style capitalism in the near-term after witnessing the near collapse of the Western economic system in 2008/09.
    • Robert Kapp: It appears that Beijing’s strategy in regards to dealing with social unrest is equivalent to “stomping out small fires” rather than enacting sweeping reforms to prevent such conflicts in the first place.

Darius Dale

Senior Analyst

Short Selling Opportunity II: SP500 Levels, Refreshed

POSITION: Long Energy (XLE), Short SP500 (SPY)


Am I a day, week, or month early? I don’t know. Being early is called being wrong. Been there, done that.


If you’re not right and the fundamental framework of your position changes, you should change. Today’s lagging indicator (US Employment Report) is a January number that reflects a lot of why I was bullish for the 6 weeks running into last week’s US Dollar Debauchery.


From here, I think inflation expectations continue to rise and growth expectations continue to slow. If that changes, I will. But like February of last year when I made this call, you don’t get the February slowdown data in the January numbers.


Across all 3 risk management durations, here are the lines that matter to me most right now: 

  1. Immediate-term TRADE overbought = 1343 (that’s where I shorted SPY again this morning)
  2. Immediate-term TRADE support = 1321
  3. Long-term TAIL support = 1267 

With the long-term TAIL intact, you should naturally be asking me why Newt and the SP500 can’t fly from here to the moon from here. I tend to get these questions after rallies, not before them. It’s just human nature.


Provided that the US Dollar’s immediate-term TRADE remains bearish and we keep making lower long-term highs on lower and lower volume studies in the SP500, I’ll stay with this call.


Long inflation, short growth.




Keith R. McCullough
Chief Executive Officer


Short Selling Opportunity II: SP500 Levels, Refreshed - SPX

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