The Economic Data calendar for the week of the 12th of March through the 16th 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.
No Current Positions in Europe
Asset Class Performance:
Once again we’ve gotten past a hurdle in the market with confirmation just this morning that the Greek PSI received the critical participation rate, Collective Action Clauses (CACs) were activated, and ISDA ruled that the bonds swapped will trigger a CDS event. However, what’s lost in the near-term hurdles is the underlying flaws of a Union of disparate countries governed by one monetary policy. Namely without the ability to devalue one’s currency and inflate one’s way out debt obligations, or even default (which Eurocrats continue to suspend), Eurozone countries (like a Greece, Portugal, or Spain) can at best deflate wages to gain competitiveness. The problem with this policy, of course, is that it reduces domestic spending power, and therefore further stagnates total output.
The major fallacy that Eurocrats are running with is that through the Fiscal Compact they can manage governments’ budgets, initially by setting targets on debt and deficit levels and when necessary intervening to assure these targets are met. The flaw in this assumption is that countries are not likely to give up sovereignty to Brussels or Frankfurt to manage their spending, and that setting “artificial” targets is inappropriate for disparate countries, and hasn’t worked in the past (think Stability and Growth Pact). For economies that are not all created equal – for example, some may have large current account surpluses and others deficits or varying levels of capital accounts (investment) –a Union with one monetary policy inadequately addresses disparate levels of growth, and can distort the flow of goods and investment across countries.
While the above only begins to touch on the imbalance created in binding uneven economies to one monetary policy, here we’ll reiterate that we do think Eurocrats will do everything in their power to maintain this existing and flawed Union. We expect this to bring volatility to markets, like we’ve seen over the last 18+ months, and monetary policy to continue to drive a larger divergence in the “Have’s” versus “Have Nots” within the Union, which will ultimately lead to protracted economic weakness and fiscal imbalances.
Eurozone Q4 GDP -0.3% Q/Q and 0.7% Y/Y
Eurozone Retail Sales 0.0% JAN Y/Y vs -1.3% DEC [0.3% JAN M/M vs -0.5%]
Eurozone Sentix Investor Confidence -8.2 MAR vs -11.1 FEB
Germany Factory Orders -4.9% JAN Y/Y (exp. -1.7%) vs 0.0% DEC
Germany Exports 2.3% JAN M/M vs -4,4% DEC
Germany Imports 2.4% JAN M/M vs -3.9% DEC
Germany Industrial Production 1.8% JAN Y/Y (exp. 1.1%) vs 1.3% DEC [1.6% JAN M/M (exp. 1.1%) vs -2.6% DEC]
Germany CPI 2.5% FEB Final, in line w initial
France Manufacturing Production -1.2% JAN Y/Y vs 0.8% DEC
France Industrial Production -1.5% JAN Y/Y vs -1.2% DEC
France Bank of France Business Sentiment 95 FEB vs 96 JAN
France Non-Farm Payrolls -0.1% in Q4 Q/Q vs -0.2% in Q3 Q/Q
Greece Q4 GDP -7.5% Y/Y vs original est. of -7%
Greece CPI 1.7% FEB Y/Y vs 2.1% JAN
Greece Unemployment Rate 21.0% DEC vs 20.9% JAN
Portugal Q4 GDP -2.8% Y/Y vs -2.7% in Q3 [-1.3% Q/Q vs -1.3% in Q3]
Spain Retail Sales -4.8% JAN Y/Y vs -6.4% DEC
UK BOE/GfK Inflation next 12 months 3.5% FEB Y/y vs 4.1% JAN
UK Industrial Production -3.8% JAN Y/Y vs -3.1% DEC [-0.4% JAN M/M vs 0.4% DEC]
UK Manufacturing Production 0.3% JAN Y/Y vs 0.9% DEC [0.1% JAN M/M vs 1.1% DEC]
UK PPI Input 7.3% FEB Y/Y vs 6.6% JAN [2.1% FEB M/M vs 0.1% JAN]
UK PPI Output 4.1% FEB Y/Y vs 4.0% JAN [0.6% FEB M/M vs 0.4% JAN]
Sweden Industrial Production 2.1% JAN Y/Y vs -0.4% DEC
Norway CPI 1.2% FEB Y/Y vs 0.5% JAN
Switzerland CPI -1.2% FEB Y/Y (exp. -0.7%) vs -0.9% JAN
Switzerland Retail Sales 4.4% JAN Y/Y vs 1.7% DEC
Interest Rate Decisions:
BOE Interest Rate UNCH at 0.50% and bond purchasing program remains at 325 Billion GBP
ECB Interest Rate UNCH at 1.00%
CDS Risk Monitor:
Compared to previous weeks, we did not see huge moves in 5YR CDS on a week-over-week basis. Portugal rose the most at 42bps to 1229bps, followed by Spain (+37bps) to 396bps, Ireland (+32bps) to 620bps, and Italy (+10bps) to 369bps. One inflection to note is that Italian CDS traded below Spain, throughout the week. As the chart below shows, since August 2011, Italian CDS was priced comfortably above Spanish CDS.
The European Week Ahead:
Monday: Eurogroup Meeting; Q2 Germany Manpower Employment Outlook; Feb. Germany Wholesale Price Index; Feb. UK RICS House Price Balance; Q4 Italy GDP – Final; Jan. Greece Industrial Production
Tuesday: Mar. Eurozone ZEW Survey (Econ. Sentiment); Mar. Germany ZEW Survey (Current Situation and Econ. Sentiment); Jan. UK House Prices, Trade Balance; Feb. France CPI; Jan. France Current Account; Feb. Russia Budget Level (Mar 13-15); Jan. Russia Trade Balance; Feb. Italy and Spain CPI - Final
Wednesday: Feb. Eurozone CPI; Feb. UK Claimant Count, Jobless Count Change, Jan. UK Weekly Earnings, ILO Unemployment Rate
Thursday: Mar. Eurozone Monthly Report Published; Feb. Eurozone 25 New Car Registrations; Q4 Eurozone Labour Costs, Employment; Jan. Italy General Government Debt; Q4 Spain House Prices; Q4 Greece Unemployment Rate
Friday: Jan. Eurozone Trade Balance; Feb. Russia Industrial Production, Producer Prices; Jan. Italy Trade Balance, Current Account; Q4 Spain Labour Costs
Extended Calendar Call-Outs:
20 March: Greece’s €14.5 billion Bond Redemption due.
22 April: French Elections (Round 1) begins, to conclude in May.
29 April: Potential Greek Presidential Elections
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.
Keith sold our long position in GLD in the Hedgeye Virtual Portfolio this morning. He noted, “Gold is snapping my intermediate-term TREND line again on a consequential USD Index breakout > TREND support. The Risk Management Process says take the loss here.”
The USD is breaking out above our TREND line of support, $79.03 on the USD index.
The inverse correlation between the USD and gold has strengthened to -0.75 on the 15d duration and to -0.78 on the 90d duration.
With gold flirting with its own TREND line of support, $1693, the proper risk management decision is to sell the position. While gold is stronger today after ISDA triggered the CDS insuring Greek debt, we think that the strength is transient and that the USD correlation will be the primary factor driving the price of gold on the go-forward.
Lastly, sentiment is increasingly becoming a headwind. Bloomberg reported earlier today that, “Gold traders are the most bullish in four months after investors accumulated more metal than ever and hedge funds raised bets on gains to a five-month high. Sixteen of 23 analysts surveyed by Bloomberg expect prices to gain next week and one was neutral, the highest proportion since Nov. 11. Investors increased their holdings in exchange- traded products backed by bullion for seven consecutive weeks and now hold 2,407 metric tons valued at $131 billion, data compiled by Bloomberg show.”
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
Some incremental changes coming to a MCD menu near you – what are the implications?
As first reported by Reuters, McDonald's “will be tweaking and expanding their value-priced items” at the end of March. MCD has not discussed this with the street due to competitive reasons.
As we learned in conversation with the company, they are focusing the menu on four tiers (not including combo meals):
In trying to understand the implications of what McDonald’s is doing, a restaurant industry consultant and associate of ours had this to say: “I get a kick out of these corporate guys at WEN and MCD pretending they have some magical formula for value pricing. It's 100% driven by food costs and customer behavior.” Given that MCD is seeing increasing inflation in 2012, we believe they are trying to manage check and margin by forcing consumers to trade up to the “extra value menu” from the “dollar menu.” This makes more sense when we consider that one of the biggest changes is to remove small drinks and small fries from the dollar menu and replace those items with fresh baked cookies and ice cream cones.
HEDGEYE: We see this as a big risk for MCD. If customer preference is to have the drink and fries as part of the dollar menu then there is a risk that this change negatively impacts customer satisfaction. The company told us that a “mini-combo meal” offering may bundle the fries, burger, and drink but a decision has not been made on that yet. Still, ordering the $1 items individually is being taken off the table.
The new "Extra Value Menu" will be advertised on March 26th. According to Reuters, “the new menu will include 20-piece chicken McNuggets, double cheeseburgers, chicken snack wraps, Angus snack wraps, medium iced coffees and snack-sized McFlurries, plus up to four regional options, that were previously listed elsewhere on its menu.” The idea for McDonald’s is to streamline and change what is highlighted on the menu. The company likes to phrase this differently, saying that they are, “making it easier for customers to find them [‘Extra Value Menu’ items]”.
HEDGEYE: From our perspective, the big problem is that the "Dollar Menu" has been around for a very long time. Inflation has made it an unprofitable but necessary evil. Customers, also pressed by inflation, have been migrating from the combo meals on the core menu, which can cost $6-7, over to the Dollar Menu where the value customers get is almost double from a price perspective. We view this latest change as an attempt by the company to stem this flow of business from the core menu to the dollar menu. This adds an extra emphasis on the importance of April sales; investors will be watching closely for an indication of whether or not the new menu strategy is working.
Is this finally the sandbagged guidance?
"Our base of business for 2012 is solid and booking volumes have gradually improved, which we believe is a testament to consumer confidence in the cruise industry's long-standing record of exceptional safety. Despite the slowdown in bookings, all of our North American brands are still expecting a modest yield improvement in 2012 while our European brands, excluding Costa, are expecting to have slightly lower yields due in part to the slowing European economies. Overall, based on current pricing trends, any consumers holding out for deeper than normal discounts may be disappointed."
Mickey Arison - CEO
HIGHLIGHTS FROM THE RELEASE
Today’s employment data was strong across the board for the restaurant industry.
As the chart below shows, all of the age cohorts we track on a monthly basis avoided year-over-year decline in February. This is the first time we have seen green all the way across the table since February 2007. The 20-24 YOA cohort saw a 60 basis point sequential acceleration in year-over-year employment growth which is a positive for QSR companies. The one sequential slowdown in employment growth came in the 45-54 YOA cohort. Overall, this employment data is a positive for casual dining, given both the broad-based employment gains and the improvement in the older 55-64 YOA cohort’s outlook.
Hiring trends in the restaurant industry remain strong as of January (this data set lags by one month). As the chart below illustrates, hiring growth in the full service and limited service dining industries are growing at prerecession levels. The U.S. Employment Situation Report for February called out the food service industry as a bright spot in the recent employment trends:
"In February, employment in leisure and hospitality increased by 44,000, with nearly all of the increase in food services and drinking places (+41,000). Since a recent low in February 2010, food services has added 531,000 jobs."
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