Weekly European Monitor: Clean-Up, Aisle 9

No Current Positions in Europe


Asset Class Performance:

  • Equities:  Bottom performers: Cyprus -7.9%; Slovakia -3.9%; Ukraine 3.9%; Spain -3.3%; Austria -3.0%.  Top performers:  Switzerland 60bps; Greece 40bps
  • FX:  The EUR/USD is down -0.61% week-over-week.  Divergences: SEK/EUR -1.3%, NOK/EUR -1.1%; HUF/EUR -0.96%, GBP/EUR -0.34%; CHF/EUR +0.07%.
  • Fixed Income:  Excluding Greece, 10YR sovereign yields we largely flat week-over-week. Greek yields tumbled a 109bps on the PSI announcement, while the Italian 10YR yield saw the second greatest decline at -18bps to 4.77%. Spanish and Italian yields continue to trend lower, while Portugal flashes increased signs of risk.

Weekly European Monitor: Clean-Up, Aisle 9  - 11. yields


In Review:

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. 



Data Dump:

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%



Services PMI:



Weekly European Monitor: Clean-Up, Aisle 9  - 11. services




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.


Weekly European Monitor: Clean-Up, Aisle 9  - 11. cds a


Weekly European Monitor: Clean-Up, Aisle 9  - 11. cds b



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.




Matthew Hedrick

Senior Analyst

Selling Gold on USD Breakout

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.


Selling Gold on USD Breakout - 1


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.


Selling Gold on USD Breakout - 2


Selling Gold on USD Breakout - 3


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.


Selling Gold on USD Breakout - 4


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.”


Kevin Kaiser



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):

  1. Premium: $4.50-$5.50+
  2. Core: $3.50-$4.50
  3. Extra Value Menu (new): $1.20 to $3.50+
  4. Dollar menu  

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.


Howard Penney 

Managing Director


Rory Green


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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




  • 1Q 
    • NA brands grew 4%; EAA brands grew 3%
    • Net ticket yield: 2.6%; Onboard yield: 3.7%
      • NA yield: 5.0%, driven by Caribbean; Caribbean represented 2/3 of NA capacity
      • Euro yield: flat
      • EAA onboard yield lower
    • 1/2 of the increase in NCC driven by Costa Concordia ("CC") and Costa Allegra ("CA")
  • 2012 NCC guidance unchanged from previous guidance
  • As time passes they are confident that their business will improve. In continental Europe, the impact of the accident has had a larger impact
  • Recently they have seen an improvement in European bookings
  • Costa will resume marketing in the next coming weeks
  • Rest of 2012 guidance
    • 2012 net yield (ex Costa) down 1.5% (in-line with 2011)
    • NA: slightly lower occupancy, higher prices
    • EAA: lower occupancy,higher prices
    • 7 wks post CC accident: 
      • Fleetwide: lower mid-to high single digits bookings at lower prices
      • NA: mid single digit decline in bookings at slightly lower prices; weakest itineraries had been European-based. Higher airfare affected NA European cruises
      • EAA (ex Costa): bookings lower in mid-teens range at lower prices. Spain/Germany hurt most; UK holding up
  • Costa brand
    • Relatively few cancellations since the incident
    • Future cruises were rebooked on other Costa cruises
    • Last week March 4: bookings were down 50%; up from 80-90% decline in bookings following accident
    • Estimate up to a year before bookings become normal
    • Holding pricing and sacrificing occupancy to maintain 'order in the markets'
    • Forecast loss of $100MM in 2012
  • 2Q guidance
    • Capacity: +2.7% (+2.9% NA, +2.2% EAA)
    • Fleetwide: higher pricing, flat occupancy 
    • NA: 56% of capacity in the Caribbean
      • Caribbean pricing nicely higher, same occupancy
      • All other itineraries: pricing higher, slightly lower occupancy
    • EAA (ex Costa): pricing slightly lower, lower occupancy
    • All other itineraries: lower pricing, lower occupancy
  • 3Q guidance
    • Capacity: +2.9% (+3.4% NA, +2.2% EAA)
    • Fleetwide: higher pricing, lower occupancy
    • NA capacity: 38% Caribbean (slightly higher); 34% Alaska (same YoY); 25% Europe (same YoY
      • Caribbean pricing: higher YoY; Alaska/Europe cruises flat YoY
    • EA capacity: 85% Europe (up from 82%); 
      • EAA pricing: higher, lower occupancy
  • 4Q guidance:
    • Capacity: +2.9% (+3.7% NA, +1.7% EAA)
    • Fleetwide pricing higher at lower occupancy
    • NA: pricing flat, lower occupancy
    • NA capacity: 43% Caribbean (slightly higher YoY); 13% Europe (same YoY);
      • Caribbean pricing higher, higher occupancy
      • Europe pricing higher, lower occupancy
      • All other itineraries: higher pricing, lower occupancy 
    • EAA: nicely higher pricing, lower occupancy 



  • Marketing/discounting will not be greater than last year
  • Close-in patterns are good
  • Biggest obstacle to bookings is that people are expecting lower prices, but that's not going to happen. Once people realize that, bookings should pick up
  • Really feel like the Costa impact will be short term in nature – just need to take the pain of lower occupancy and hold pricing
  • NA: Carnival outperforming premium brands
    • First timers: Carnival brand not having problems; other brands doing fine except with European cruises.
  • Ibero charge: 
    • They had projections of growing the brand over time. In reality they have reduced capacity by moving ships out of the market. And so when they pulled capacity out of the model it required a write down. They still believe in the Spanish market but Ibero is still struggling
    • It will take longer for the Spanish economy to return to strength so it became hard to justify growth in that market.
  • Why are they confident that the Costa impact will take a year to come back vs. longer or shorter?
    • That’s what the research has indicated using other examples of companies in crisis
    • Also the signs of positive trending that they are already seeing even without marketing. 
    • Will take a year or 2 to return to profitability
    • The capacity will also have 3 less ships than previously predicted for 2013
  • Markets with less Costa presence markets (ex. Germany, France, Italy, etc) showing some comeback 
  • Germany is showing signs of recovery while Italy is still very challenged
  • Overcapacity?
    • No. Growing at much slower pace (2-3 ships)
    • Allegra is for sale
    • Low single-digit global capacity growth
  • Too early to forecast 2013 but 'future is bright'
  • UK/Germany market weren't impacted by the Costa incident
  • AIDA brand: had taken down revenue yields due to CC;
    • Last week, bookings were higher YoY for the first time this year
  • Allegra: do not intend to put back into service
  • 2012 NCC flat guidance: advertising down in Q1, inflation is lower than previously expected
  • Higher safety regulations costs not expected in 2013
  • April/May easy comparisons
  • 300 itinerary changes made last year (mostly were Costa)
  • CC full removal date? 
    • Salvage process to begin after summer 
    • Duration: 10-12 months 
  • Onboard spending: do not expect a significant change; ex Costa, 1.5% increase for 2012 guidance; all major categories up including casino 1Q
  • Alaska: 'pretty consistent and solid but not spectacular'. Strength in Alaska may be at the expense of a weaker Europe
  • Costa improvement last 7 weeks: mainly due to occupancy gains
  • No need to obtain additional financing to fund capex
  • Dividend: long-term target (30-40%) sustainable
  • 2012/2013 Capex guidance: $2.6BN, $1.9BN (including $750MM other capex for existing fleet)



  • 1Q2012 results: 
    • EPS: loss of $0.18 (consensus $-0.06)
    • Constant $ net revenue yields: +2.9% (guidance of +2%)
    • Gross revenue yields (in constant $): +1%
    • Constant dollar net cruise costs: +6.4% (guidance of +4%)
    • Fuel: +30% YoY to $707/metric ton 
  • 2Q2012 guidance
    • Current dollar net revenue yields: -4% to -5%
    • Constant dollar net revenue yields: -2.5% to 3.5% 
    • Current dollar net cruise costs (ex. fuel): -2% to -3%
    • Constant dollar net cruise costs (ex. fuel): -1% to 0%
    • Fuel: $772/metric ton; 863k metric tons
    • EPS: $0.05-0.09 (consensus: $0.18)
  • FY2012 guidance:
    • Diluted EPS:$1.40-$1.70 (previous guidance: $2.07 to $2.34; consensus: $2.06)
    • Constant dollar net revenue yields: -2.0% to -4.0% 
    • Constant dollar net cruise costs (ex. fuel): -0.5% to 0.5%
    • Fuel: $766/metric ton
    • Fuel consumption: 3,382k
  • The company recognized $21 million of net unrealized gains on its portfolio of fuel derivatives during 1Q 2012.
  • 2012 outlook
    • "At this time, cumulative advance bookings, excluding Costa, for the remainder of 2012 are approximately 3 occupancy points behind the prior year with prices slightly higher than last year's levels (constant dollars). Since the date of the Costa Concordia incident in mid-January through February 26, fleetwide booking volumes, excluding Costa, have shown improving trends but are still running high single digits behind the prior year at slightly lower prices. There has been less impact on the company's North American brands than European brands."
  • 2012 Cash flow: $3.3 BN


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."


THE EMPLOYMENT DATA IS BULLISH - restaurant employmnet



Howard Penney

Managing Director


Rory Green


Selling Green: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Consumer (XLY)


Buy red, Sell green. Rinse and Repeat.


My last communiqué was on Tuesday (“Short Covering Opportunity” on 3/6/11 at 11:29AM EST) and it was harder to buy then than it is for the performance chasing community right here and now. We’re right at levels in the SP500 and the VIX where I think this is an easy call to make.


Here are the lines, across my risk management durations, that currently matter to me most: 

  1. Immediate-term TRADE resistance = 1374
  2. Immediate-term TRADE support = 1345
  3. Intermediate-term TREND support = 1283 

With the US Dollar Index breaking out to the upside (above $79.03 TREND support), I am getting more constructive on US Equities – but from a price. On Tuesday my buy/cover line was 1345. It still is today.


Enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Selling Green: SP500 Levels, Refreshed - SPX

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