Weekly European Monitor: Guiding Expectations

Positions in Europe: Short Greece (GREK), Short Spain (EWP)


Asset Class Performance:

  • Equities:   Top performers:  Hungary 4.7%; Germany 4.0%; Belgium 3.7%; Italy 3.7%; Austria 3.6%.  Bottom performers:  Cyprus -1.7%; Portugal -1.4%; Romania -70bps.
  • FX:  The EUR/USD is up +0.40% week-over-week.  Divergences: HUF/EUR +0.96%, GBP/EUR +0.68%; NOK/EUR -0.84%, PLN/EUR -0.76%. The HUF/EUR leads all major expanded currencies at +8.87% year-to-date. 
  • Fixed Income:  Greek debt was re-priced this week following agreement on the PSI; the Greek 10YR yield fell a monster 1844bps to 18.12% week-over-week.  Portugal’s 10YR led to the downside, falling -22bps to 13.64%, while Spain saw the largest gain at +23bps to 5.19%.  

Weekly European Monitor: Guiding Expectations - 11. neu yields



Call Outs:

  • Greece now has the highest gas price in the continent at over $9.00/gallon.
  • Fitch upgraded Greece from restricted default to B-minus with a stable outlook following the completion of the country's debt swap with private investors.
  • Greece’s Presidential election is to be held on April 29th or May 6th, spokesman Pantelis Kapsis.
  • Spain - Finance Minister Luis de Guindos said Spain would comply with a demand by euro-zone finance ministers that it cut its deficit to 5.3% of gross domestic product in 2012, while sticking to its 2013 target of 3%.
  • UK - Fitch revises UK outlook to Negative from Stable, and keeps country at AAA.
  • Russia – President Medvedev’s human rights council urged him to pardon Mikhail Khodorkovsky in his last weeks in office, presenting legal advice that this doesn’t need an admission of guilt from the former Yukos Oil Co. owner. The recommendation will be discussed at the council’s meeting with Medvedev next month. [PM and President-elect Putin will take over as head of state on May 7].


In Review:

This week we added two European positions to the Hedgeye Virtual Portfolio, Spain (EWP) and Greece (GREK), both on the short side.


Despite the market’s recent optimism around the two rounds of 36-month LTROs and that we “cleared” Greece’s debt restructuring, we want to temper expectations that Europe is “out and in the clear”.  While the LTROs have added needed liquidity to the system, there’s no evidence (yet) that this liquidity has enter the real economy. One negative data point we do continue to observe is Overnight Bank Deposits to the ECB, which is just off its high at €727.7 Billion. Further, this injection does nothing for solvency issues of banks; Spanish, Portuguese, and Italian lenders on the metric of 5YR CDS continue to flash risk levels that are comfortably above 350bps! While a re-pricing of Greek debt saw its 10YR sovereign bond yield fall nearly 1900bps in a straight line early this week, risk is clear and present in Portugal, with the 10YR at 13.6%. And while yields in Italy and Spain have trended lower YTD, there’s nothing that concretely justifies yields maintaining this retreat short of a Monti - Draghi handshake to take care of Italia.


While “cheap” credit flows should help to spark the region’s economy, it will be off a recessionary level in 2012, as outsized debt and deficits budge little and austerity takes a firm toll not only on confidence and spending but also government tax receipts.  All this spells a very long runway ahead of slow growth, alongside threats of rising inflation, most notably from energy costs. 


News out this week that Spain missed its 2011 deficit target was particularly representative of the structural fiscal imbalances versus expectations across much of the region.  To review, Spanish PM Mariano Rajoy, elected in December of 2011, inherited a budget that was proved to be fudged, with the 2011 budget deficit now estimated at 8.5% of GDP versus a previous target at 6%. This gap has thrown off the 2012 budget deficit reduction program, and the government unilaterally (ex-EU agreement) revised its 2012 deficit target to 5.8% versus the original 4.4% promise.  The EU this week said that wasn’t enough, and mandated that additional budget cuts worth 0.5% of GDP must be carried out.


Sound a bit like Greece? Can the market really believe Troika’s report that Greece can reduce its public debt to 120% of GDP by 2020? Does Troika even (truly) believe that given the myriad of variables between now and then?  We don’t think so. What governments must realize is that shaving the fat off budgets is essential, but so are the expectations around meeting those cuts. Whether the EU or the countries themselves are responsible for setting goals that are too optimistic or too lenient (in trimming fat) is for another discussion, yet what’s important is that realistic targets are set around which markets can set expectations.


We do think that taking the pain now through fiscal austerity will sacrifice growth, but this is a necessary condition given the years of excess spending by the PIIGS (and others).  


The road to maintain the existing Eurozone fabric is a clouded one. However, if it’s going to work, it will come at the hand of this fiscal consolidation and further bailouts to support the Eurozone project. There are plenty of arguments to justify an exit or dissolution of the Union, however here and now we won’t discount the fortitude of Eurocrats to hold the whole together, with shoe lace and all.   



CDS Risk Monitor:


Short of Portugal, we did not see huge moves in 5YR CDS on a week-over-week basis. Portugal saw the biggest gain at +82bps to 1,311bps, followed by Ireland +15bps to 635bps.  France saw the biggest drop (-10bps) to 169bps.  


Weekly European Monitor: Guiding Expectations - 11. cds   a


Weekly European Monitor: Guiding Expectations - 11. cds   b


Data Dump:

Eurozone Economic Sentiment 11 MAR vs -8.1 FEB

Eurozone CPI 2.7% FEB Y/Y vs 2.7% JAN

Eurozone Industrial Production -1.2% JAN Y/Y (exp. -0.8%) vs -1.8% DEC

EU New Car Registrations -9.7% FEB Y/Y vs -7.1% JAN

Eurozone Trade Balance -7.6B EUR JAN (exp. -3B EUR) vs 9.1B EUR DEC


Germany Wholesale Price Index 1.9% FEB M/M (exp. 1.0%) vs 1.2% JAN   [2.6% FEB Y/Y (exp. 2.6%) vs 3.0% JAN]

Germany ZEW Current Account 37.6 MAR (exp. 41.5) vs 40.3 FEB

Germany ZEW Economic Sentiment 22.3 MAR (exp. 10) vs 5.4 FEB (highest since June 2010)  


Italy Q4 GDP Final -0.7% Q/Q (exp. -0.7%) vs previous -0.7%   [-0.4% Y/Y (exp. -0.5%) vs previous -0.5%]

Italy CPI 3.4% FEB Final Y/Y UNCH


France CPI 2.5% FEB Y/Y (exp. +2.6%) vs 2.6% JAN  [fell for 2nd month]


Spain CPI 1.9% FEB Final Y/Y UNCH

Spain House Transactions -26.3% JAN Y/Y vs -25.3% DEC

Spain House Price ToT Homes Y/Y -4.2% in Q4 Y/Y vs -2.8% in Q3


Switzerland Producers and Import Prices 0.8% FEB M/M (exp. +0.2%) vs 0.0% JAN   [-1.9% FEB Y/Y (exp. -2.4%) vs -2.4% JAN]

Switzerland Credit Suisse ZEW Survey Expectations of Growth 0.0 MAR vs -21.2 FEB


UK Claimant Count Rate 5% FEB vs 5% JAN

UK Jobless Claims Chg 7.2K FEB (est. 5K) vs 7K JAN (12th straight increase)

UK ILO Unemployment Rate 8.4% JAN vs 8.4% DEC


Greece Unemployment Rate 20.7% Q4 vs 17.7% in Q3

Greece Industrial Production -5.0% JAN Y/Y vs -11.3% DEC


Sweden Unemployment Rate (SA) 6% FEB vs 6% JAN

Sweden Unemployment Rate 7.8% FEB vs 8% JAN


Ireland CPI 2.1% FEB Y/Y vs 2.2% JAN

Ireland Industrial Production -0.5% JAN Y/Y vs -3.5% DEC


Portugal CPI 3.6% FEB Y/Y vs 3.4% JAN



Interest Rate Decisions:

(3/14) Norway Norges Bank CUT Deposit Rates 50bps to 1.75%.

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


The European Week Ahead:

Monday: Jan. Eurozone Current Account, Construction Output; Jan. Italy Industrial Orders and Sales


Tuesday:  Greece 14.5 B Euro Bond Redemption; Feb. Germany Producer Prices; Feb. UK CPI, Retail Price Index, RPI, CBI Trends; Jan. Greece Current Account; Jan. Spain Trade Balance  


Wednesday: UK BoE Minutes, Osborne Announces Budget Plans; Feb. UK Public Finances, Public Sector Net Borrowing


Thursday: Mar. Eurozone Consumer Confidence and PMI Manufacturing, Services, Composite – Advance; Jan. Eurozone Industrial New Orders; Mar. Germany PMI Manufacturing and Services – Advance; Feb. UK Retail Sales, Consumer Confidence; Mar. France PMI Manufacturing and Services – Preliminary


Friday: Feb. UK BBA Loans for House Purchases; Mar. France Production Outlook Indicator, Business Confidence Indicator, Q4 France Wages – Final; Jan. Italy Retail Sales



Extended Calendar Call-Outs:

22 April:  French Elections (Round 1) begin, 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


It’s amazing how far this company has come since the early days of 2009 when you couldn’t give the stock away.  Today, the investment case remains compelling.  The Starbucks turnaround has been nothing but spectacular and we continue to own the stock in the Hedgeye Virtual Portfolio.


Below, we have outlined some of the attributes of Starbucks that we believe will continue to fuel this company’s progress.

  1. A global retail footprint with 17,000 stores around the world; 60 million customer visits a week
  2. Frequency of customer visits that's perhaps unmatched in all of consumer
  3. Strong marketing and a social media presence that is innovative and authentic
  4. A rapidly growing and highly profitable consumer products business, which is allows the brand to grow “across multiple channels and multiple products globally.”

Below, we run through our thoughts on some of the more important topics raised by Troy Alstead, CFO of Starbucks, during a recent conference.





SBUX: “Prior to 2008, any bump up or down in consumer confidence was a bump up or down in that period of time to what happened in our stores, to our traffic, and to overall comp growth … we transformed the business over the last few years to focus on creating a wedge between those two lines, to give us some degree of insulation from what's happening in the overall macro environment to what happens in our stores. And, we've done that through things like our loyalty program, through elevating the customer experience in our stores back to the extremely high levels they had been historically and frankly to new levels.”


HEDGEYE: This is very interesting commentary about how Starbucks thinks about its business.  However, we would argue that the unemployment rate jumping 1-2% would slow traffic – particularly during the morning day part.  The following statement should raise eyebrows; “Today, the highest correlation to comp growth in our stores is our own satisfaction, as measured by our customers, in our stores.”  Paying attention to the macro indicators helps forecast that weather or operating environment and we believe that paying attention to the prevailing economic winds remains an important part of an investment thesis for Starbucks.





SBUX: “The loyalty program and our loyal customer set overall is a critical element of what we have built over time … it's given us a much more tangible way now to communicate with our customers, to give them an opportunity to engage with the brand, and to be rewarded for that. We have a very, very powerful digital presence, similar to our loyalty program itself, gives customers a chance to engage with us, to be a part of that dialog, and that's – no question – for us been an important part of our recovery in our business in the last two years and we think it gives us opportunities to engage more deeply with our customers in the years ahead.”


HEDGEYE: Technology has become a key driver of successful loyalty programs and a big driver of incremental traffic for the better-positioned restaurant companies.  With an expected one billion smart phone users, globally, by 2016, digital marketing is a must for every restaurant company and Starbucks is arguably one of the best companies, globally, at driving sales through new media.





SBUX: “Our average unit volumes in our U.S. business stand at about $1.1 million today. That's the highest they've been in history and still more than half of that volume comes in the morning day part. Now, in recent years, we have slowly but surely begun to move the needle. That statistic I just threw out was 70% in the morning not all that long ago.” 


HEDGEYE: When companies in the restaurant industry focus on operating their existing assets more efficiently, it is amazing how innovative they can be.  Driving same-store sales over the next few years will be based primarily upon:

  1. Deepening offerings at lunch
  2. More relevant food options for the afternoon day part (Starbucks Petites Platform)
  3. Focusing on building sales of “attached-to-beverage” food items in the afternoon
  4. Raising the ceiling on capacity during busy morning period through technology (new POS system)
  5. Beverage innovation and general productivity.





"With our acquisition of Evolution Fresh, just very recently, this acquisition not only gives us an opportunity to significantly elevate and reinvent the $1.6-billion super-premium juice category, it also gives us a very significant next step into the overall $50-billion health and wellness category.


Consumers expect something different and differentiated when they come into Starbucks stores. We know that with our coffee beverages, our tea beverages, our food offerings and now with Evolution Fresh, we have the opportunity to elevate that within the Starbucks store as one pillar of introducing customers to this product. Standalone Evolution Fresh stores, concept stores which we'll open soon, and leveraging that further into the CPG channels."


HEDGEYE: Part of the growth profile of the company will be new unit growth.  International, especially China will be a big part of that growth.  Conceptually, we think the idea of expanding into the premium juice category could be successful for Starbucks but it will take a considerable amount of time before Evolution Fresh has any meaningful impact on the growth rate of the country.





SBUX: “Last week we announced our plans to round out our portfolio in the single-cup space by launching Verismo by Starbucks later this year.  Verismo fills out this offering to consumers by being a high-pressure offering – a high-pressure machine that allow – that provides that espresso opportunity in the single-cup space really for the first time for Starbucks and in a meaningful way.”


HEDGEYE: The battle between GMCR and SBUX is just beginning and we are betting on SBUX is going to be the ultimate winner.  Launching Starbucks K-Cups through the Keurig platform gave the company access to the largest installed base of single-cup brewers in the United States.  Starbucks continues to speak diplomatically about Green Mountain but we do not see that as a long-lasting partnership.





SBUX: “Our long-term targets for margins in the CPG segment are at 30% or somewhat higher than that, we believe, over time.  We had expected and targeted about 25% this year and that's about where we're trending at this point and that's driven by really two things.


Given visibility we have into coffee costs in the next year, which we now have a tailwind coming out of 2013 as well as lapping the investments we've made in the infrastructure in that division, we expect by the time we move into 2013 to move back into the upper 20%s and over the next two years to approach that 30% margin level again in CPG."


HEDGEYE: The CPG business is poised to show accelerating sales trends and stronger margins for the   next two years.  Coffee costs coming down sharply this year is very helpful for the CPG business; it was the hardest-hit during the recent spikes in the spot price of the commodity.



Howard Penney

Managing Director


Rory Green


CPI: Cost vs Price Divergence

CPI numbers released this morning for apparel appear to be moving lock-step with the change in import prices.  Apparel CPI rang in at +4.17% vs. last year. Big number, but a deceleration from 4.65% in Jan. It's really a nit-pick to note that this is a 'slow down.' Though it is worth noting that the rate has stopped going up.


What is worth noting (chart 1) is that when looking at the underlying trend on a 2-yr basis, the CPI is rolling at a greater rate, while import prices are still headed up.


We know that this is backward looking, and that input cost compares get easy in 2H. But the problem is that everyone and their grandmother knows this too. Most companies are baking this into their models, and their guidance. Importantly, they are not accounting for what will happen to their plan if a competitors' plan fails. 


In other words, the consumer needs to continue to pay up for apparel. We need to continue to see low single digit yy CPI growth -- even though comps start to get extremely tough mid-summer.


Watch these Macro trends. They matter.


CPI: Cost vs Price Divergence - 3 16 2012 11 02 08 AM


CPI: Cost vs Price Divergence - 3 16 2012 11 01 01 AM


CPI: Cost vs Price Divergence - 3 16 2012 11 04 49 AM

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.


February’s data showed a continuation of the narrowing of the spread between CPI for Food at Home and CPI for Food Away from Home.


This is a trend that we called out in Wednesday’s WEEKLY COMMODITY CHARTBOOK; the advantage that restaurants have enjoyed in terms of lower prices increases year-over-year as compared to grocery stores is fading.  In 2011, restaurant margins were impacted by inflation but, due to strong top line trends, rising food costs did not have as severe an impact on earnings as some were anticipating.  Grocers were forced to raise prices to protect margins and we believe that restaurants’ traffic levels benefitted from that. 


McDonald’s COO Don Thompson said this week that inflation in the grocery aisle outstripping price gains at McDonald’s is good for his company and that the projection is for Food at Home and Food Away from Home CPI are projected to be between 4-5% and 2-3%, respectively.  It’s difficult to know how the year will shake out but it seems that the current trend is for the spread to be negative (higher inflation for food away from home than food at home) by May.  Obviously, this estimate pertains to the overall restaurant industry and not just McDonald’s.  The ability of restaurant companies to lap the strong comps of last year may be negatively impacted by this year-over-year change in the food value spread.


We will continue to monitor this data point going forward; we continue to believe that it will matter in 2012.  As we know from executives like Jerry Reibel at Jack in the Box, management teams in the restaurant industry pay close attention to this data when thinking about pricing.


FEBRUARY CPI DATA SHOWS NARROWING OF FOOD VALUE SPREAD - food at home vs food away from home



Howard Penney

Managing Director


Rory Green



The Macau Metro Monitor, March 16, 2012




The Statistics and Census Service (DSEC) reported that GDP in 4Q11 increased by 17.5% YoY. Growth was driven by the rise in exports of services, investment and private consumption expenditure.

  • Exports of gaming services: +25.2%
  • Visitors’ spending: 10.4%
  • Investment: 16.7%
  • Private consumption: 12.1%
  • Government final consumption: 16.3% 
  • Exports of merchandise registered: 7.7% 

4Q growth represented a deceleration from the 21.8% growth achieved in the first 3 quarters of 2011.   



Faruqi & Faruqi, LLP, a law firm concentrating on investor rights, consumer rights and enforcement of federal antitrust laws, is investigating whether certain officers and directors of Wynn violated the Foreign Corrupt Practices Act ("FCPA") by providing improper monetary benefits to government officials in Macau.  The investigation comes on the back of the SEC's inquiry into Wynn's $135MM gift to the University of Macau Development Foundation. 



Speaker's at the Hotel Investment Conference Asia Pacific (HICAP) predicted that Singapore ADR's would rise between 4-8% in 2012. OCBC Investment Research expects "solid hotel room demand growth at 6.4 per cent per annum, which would exceed overall room supply growth of 3.8 per cent per annum".  The addition of the International Cruise Terminal in 2Q12 and the government's plan to invest S$905MM into the Tourism Development Fund should drive room demand and help the Singapore Tourism board hit their visitor arrival target of 6.6% annual growth and 17MM in 2015.


WATERTIGHT CASE? Inside Asia Gaming

Inside Asia Gaming speculates that the timing of the campaign is tied to the upcoming US presidential elections.  It's no secret that Sheldon hasn't been a fan of labor unions and this may be their way of embarrassing him and any Republican candidates who Sheldon supports - like Newt Gingrich.   


MUDDY WATERS Inside Asia Gaming

Inside Asia Gaming examines how the transition of China's national leadership is complicating and stalling the approval of new Cotai projects. Given that the casino industry and gambling are political hot topics in China, Macau officials are weary of making grand plans for Cotai's future expansion without getting "approval" from the political powers that be in China.  The fact that the political players are currently in flux is likely a large driver for the delays in granting permission for the gazetting of the 4 pending projects on Cotai. The recent drama and embarrassing accusation brought out by the Wynn/ Okada lawsuits are only likely to further delay approval of Wynn's land grant. 






Commentary from CEO Keith McCullough


Top 3 Most Read (Bloomberg) this morning (Buffett, Billionaires, Morgan Stanley) all about Wall St comp; not about the “rally”; fascinating:

  1. INDIA – the Indians told the world they got off the Greenspan-put drugs (no rate cut), so the world sold their equity market down another -1% overnight (down -2.6% in 2 days). India is a net importer of inflation (oil) and has seen their yield curve go flat.
  2. OIL – after attempting to SPR global Consumers yesterday while they were watching some hoops, the Administration of Central Planning denied they’d ever politicize what the DOE defines (govt website next to the slide deck on Obama’s opinion on oil supply/demand) as “the last line of defense against a supply disruption." I bought oil on that as all 3 of my durations of support held like the rock of Gibraltar.
  3. USD – this is easily the most bullish development we’ve seen since Bernanke’s attempts to debauch the dollar (Jan 25th) – gravity. US Dollar Index should close up for the 3rd consecutive week – while it may not have been for Apple and BAC, this has been a huge headwind for anything Bonds, Gold, Foreign Currency, etc. this week. Yes, anyone who is diversified across Global Macro got tagged by this Correlation Risk.


Quadruple witching options expiration and a sequentially inflating US Consumer Price report up next.





THE HBM: MCD, SBUX, PNRA, BWLD - subsector





MCD: McDonald’s China executives were questioned by food safety regulators.  According to media reports emerging this morning, McDonald’s sold chicken wings past their sell-by period.  The McDonald’s restaurant in Beijing is reported to have sold chicken wings 90 minutes after they were cooked versus the company’s guidelines of a 30 minute limit. The company said that this is an isolated case.


SBUX: Starbucks was named one of the “World’s Most Ethical Companies” in 2012 by the Ethisphere Institute.


PNRA: Panera Bread founder Ron Shaich will share the title of CEO of the company with Bill Moreton, according to a press release published yesterday.  The statement said, “The transition to co-CEOs formalizes a relationship that has evolved over the last year and is a reflection of the way in which Shaich and Moreton have been operating as partners. This change in titles is simply a statement of their partnership and shared commitment to Panera.”




COSI: Cosi declined -1.8% on accelerating volume.


CBOU: Caribou gained 4.8% on accelerating volume.  Coffee’s price declining is helping the coffee retailers many of whom took price last year to mitigate shrinking margins.





BWLD: Buffalo Wild Wings was cut to Neutral versus Outperform at Wedbush. 




PFCB: P.F. Chang’s gained 3.6% on flat volume.  This is the best performing stock in casual dining over the 90-day duration.





Howard Penney

Managing Director


Rory Green



Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.