The Domino Effect of Spanish Housing

Conclusion: Another leg down in Spanish home prices seems likely and this could potentially be the event that leads to an acceleration of stress in Spanish sovereign yields.

The focus of the sovereign debt crisis in Europe has been, rightfully so, on Greece and the potential derivative effects of a Greek default.  This despite the fact that Greece’s economy, based on the CIA’s 2011 Fact Book estimates, is only $312 billion, or less than 2% of the European Union in aggregate.  With an estimated 2011 GDP of $1.5 billion, Spain has the 12th largest economy in the world and an economy that is almost 5x the size of Greece’s GDP.


As the chart below of debt-as-percentage-of-GDP shows, Spain, so far, has been able to manage its balance sheet somewhat better than many of its neighbors with a debt-to-GDP of roughly 68.5% as of the end of 2011. (Incidentally, many believe that when incorporating regional debts, Spain is closer to 90%, currently.) Based on Spanish government estimates, this ratio will jump to 79.8% at the end of 2012.  While still below the Eurozone average of 90.4%, this is the highest acceleration in the Eurozone.  This last fact is at least partially reflected in the credit default swap market with Spain’s 5-year CDS accelerating in price in the year-to-date.


The Domino Effect of Spanish Housing - Sp.debt


Spain’s most significant headwind going forward is, simply put, growth.  Over the last two fiscal years of 2010 and 2011 combined, the lowest average growth rates in the European Union were the following countries in order:

  • Greece at an average annual growth rate of -5.2%;
  • Iceland at an average annual growth rate of -0.45%;
  • Portugal at an average annual growth rate of -0.1%;
  • Ireland at an average annual growth rate of +0.08%; and
  • Spain at an average annual growth rate of +0.15%.

Clearly, this is not an enviable group of countries and Spain is the only one amongst them that hasn’t had a complete sovereign debt meltdown.


As any sovereign credit analyst will tell you, the easiest way to resolve a sovereign debt issue is to grow out of it.  Spain’s economic growth outlook is constrained by two separate, though related, factors: employment and housing.  


In the chart below, we’ve highlighted Spanish unemployment going back to 2000.  The unemployment rate of Spain hit 23.6% in February for the 8th consecutive monthly increase, which is both the highest rate since 2000, but also literally the highest unemployment rate since World War II.  As if that weren’t enough, the government expects the unemployment rate, already the highest in the industrialized world, to increase to north of 24% this year.  The current number of unemployed in Spain is equivalent to 4.75 million, which is the highest number since the Spaniards began keeping the data in 1996.


The Domino Effect of Spanish Housing - SP.unempl


The counter view to this abnormally high unemployment rate in Spain is that there is a large and thriving underground economy, which means that government reported employment figures are understated.  Certainly, there is likely credence to this, but, even so, most estimates suggest accounting for the underground employment would only reduce the overall unemployment rate by 400 basis points.  In the shorter term, there is also the employment head wind of a recently implemented labor reform law in February that will make it easier for employers to unilaterally lay employees off and cut salaries.  Eventually, though, this is expected to make the Spanish employment market more fluid as it will likely make employers more willing to take on the risk of hiring.


The chart below highlights the structural employment issue in Spain versus the remainder of the Eurozone.  Specifically, it emphasizes the year-over-year change in unemployment by country.  In 2011, Greece was the only nation that saw unemployment increase at a quicker pace than Spain.


The Domino Effect of Spanish Housing - CH


A key reason that Spanish unemployment rates have ballooned versus the rest of the Eurozone is because Spain had a vastly more inflated housing and construction sector during the boom years.  In fact, according to Eurostat, Spain employed 2.9 million people in construction industries at, or near, the peak in 2007.  In total, this was about 1/5th of all construction workers in the EU-27 despite the fact that Spain has less than 10% of the total population.  Clearly, an improvement in Spanish employment will be predicated on a recovery in the construction sector.


Unfortunately, a recovery in Spanish housing and construction markets appears to be a long way in the coming.   Unlike most industrial nations that experienced extended housing price inflation in the late 1990s and mid-2000s, Spain actually had two bubble periods with the first beginning in 1985.  As the chart below highlights, from 1985 – 1991 home prices basically tripled, from 1992 – 1996 they basically remained flat, and from 1996 – 2008 prices more than doubled.   So far, from the peak, Spanish home prices are in aggregate only off about 20%.


There are two potential proxies for how much further home prices in Spain may have to fall.  The first is wage growth, which has historically tracked housing prices.  Intuitively, this makes sense.  The more consumers have in their pockets generally, the more they have to spend on housing (all else being equal).  As the chart below shows, wages and home prices tracked each other steadily until 2000, at which point home prices began to accelerate beyond wage growth.  Currently, home prices would need to decline just over 30% to revert back to wage growth. 


The Domino Effect of Spanish Housing - SP.housing.wage


The second proxy for further correction in Spanish home prices is the path of U.S. home prices.  Based on the Case-Shiller 20-city seasonally adjusted series, U.S. home prices have already corrected 34% peak-to-trough.  Comparing Spain to the U.S. is not quite apples-to-apples as home prices were driven much higher due to ownership rates that eclipsed 80% at the peak in Spain.  So, depending on the data set we use, from the start of the second leg of the Spanish home price bubble in 2000 compared to the U.S., Spanish home prices have a potential downside of more than 35% from current levels.


The Domino Effect of Spanish Housing -


The risk to the downside in Spanish home prices is being clearly reflected in real estate transactions in Spain.  The chart below highlights year-over-year real estate transactions by month.  In the most recent month of February 2012, transactions were down more than -30% from the prior year.  Without a sustainable pick up in the real estate market, it will be impossible for employment to improve meaningfully.  


The Domino Effect of Spanish Housing - Sp.transactions


The second derivatives of continued decline in real estate prices in Spain are both economic growth and the health of the banking system.  On the first point, the Bank of Spain estimates that a decline in home prices of one dollar will decrease consumption by $0.03.  Thus, a 15% decline in housing should reduce GDP by almost 2% over the next two years. (Hat tip to Carmel Asset Management for highlighting this analysis in the WSJ.)  This would obviously have a direct impact on Spanish banks.


Currently, the Spanish banking system is estimated to have a 1.8 trillion euro loan book.  It is estimated that roughly 20% of that is in real estate assets, of which almost half are considered troubled.  Obviously both declining real estate prices and slowing economic growth generally put increased pressure on the portion of the loan book which is currently not troubled, and equates to almost 150% of Spanish GDP.


Certainly Greece has been the rightful focus of the sovereign debt issues in Europe, but the likelihood of another serious leg down in Spanish home price could put Spain front and center in 2012.




Daryl G. Jones


Director of Research








Athletic Apparel & FW: Easter Headwind Nearing

Underlying Trends in Athletic Apparel & Footwear appear healthy, though the 1-year comp will suggest otherwise in the coming weeks.  NKE continues to gain share across several major categories in both FW & Apparel. FINL and NKE both remain among our favorites. 





Footwear sales were up ~22% last week driven almost entirely by volume; units were +21% with ASP +1%. Last week’s outperformance does reflect the tailwind from the Easter shift however the acceleration on the margin from the prior week is notable. Sales were up 4% prior to last week and grew ~18 points sequentially (to +22%) despite the industry comp increasing from (-13%) to +12%.

Beginning next week, the Easter tailwind will fade into a headwind as the industry starts to comp the weeks last year that led up to Easter weekend (4/24/11). If we assume underlying 2 yr trends remain flat, we would expect a sharp deceleration in sales down to flat to +LSD. In addition, next week’s results will include Easter (little to no spending) compared with last year which excluded the Holiday and should begin to show the seasonal spend leading up to the holiday weekend. The Footwear market has remained healthy through March and started April strong but is now approaching the Easter shift headwind. NKE (inc Brand Jordan & Converse) as well as ADIBok have been gaining share from the rest of the industry. UA lost 9bps of share last week preventing its market share from breaching the 1.1% threshold.



Unlike Footwear, Athletic apparel sales slowed last week reflecting less favorable comps which won’t fade until after Easter. Beginning next week, we expect to see a more pronounced negative impact in athletic apparel top line results from the 2012 Easter shift (4/8 this year vs. 4/24 last year). As such, we will continue to assess the health of the athletic apparel industry using underlying trailing 3 week and 2 yr growth rates. Over the past 4 weeks, we’ve seen sequential improvements in these trends within the athletic specialty channel. Should these rates remain flat as the industry laps the holiday shift, we expect year over year growth within the athletic specialty channel to be down LSD-MSD next week which will not accurately reflect top line momentum.


Over the past 2 months, strength in apparel within the athletic specialty channel has been consistently driven by NKE who has gained ~1pt+ of share per week. Alternatively, Under Armour has been losing market share. In order to identify where NKE has been gaining share, we analyzed four key categories below within the athletic specialty channel where NKE & UA combined account for ~60%+ of the domestic market.  


  • Both NKE and Adidas have consistently gained share across the 5 durations below. UA has started losing share over the past 3 months - at the same time NKE’s gains have accelerated meaningfully.
  • In the Shirts/Tops Category, NKE’s share is 43% vs. UA’s 29%. In this category, NKE has been gaining share over the past 2 years while UA has been losing. Based on the graph below, while the 28% of the industry classified as “other” has had an impact on changes in share with sales up +7%, UA’s losses over the past 5-months reflect NKE’s sales growth up +11% outpacing UA, which has been essentially flat.
  • Nike has 47% share of the bottoms category while UA only has ~11% share. The tradeoff in share is less pronounced here - while NKE has gained share over the past couple of weeks, it seems to be primarily from the “other” companies, though UA’s gains have decelerated.
  • Under Armour’s “Storm Fleece” platform is classified primarily as “sweats;” UA holds 28% share of the category vs. NKE at 47%. UA has been losing share here, down ~350 bps over the past couple of weeks, however the 27% of the industry classified as “other” has lost significantly more share. NKE has gained over 6 pts of share YTD with sales up +48% over the past 5 months, outpacing UA (+42%), and Other (+27%).
  • NKE and UA account for 95% of the compression category (27% & 68% respectively). In this category, (see chart below), major gains and losses in share do indeed come at the loss of either UA or NKE as a result. Note that NKE has been gaining 200bps+ in share over the past 2 years while UA has been losing that amount. Category sales are up +3% with NKE up +19% and UA down 1%.


It appears that the categories where NKE is in fact taking direct share from Under Armour are the shirts/tops & compression categories.


A key consideration here is that with the mid-teens US Futures growth we’ve seen out of Nike over the past quarters, we NEED to see these levels of share gains. We KNOW the product was ordered, and we KNOW the product is hitting shelves and needs to be sold. That’s why we pay particular attention to the ASP – a weak ASP would indicate that the goods needs to be heavily discounted to move off the floor. But that’s not the case. In fact, Nike’s trailing 3-week change in average price point is better than 10%. Trends appear on track here.


Matthew Darula



Athletic Apparel & FW: Easter Headwind Nearing - market share summary


Athletic Apparel & FW: Easter Headwind Nearing - shirts tops


Athletic Apparel & FW: Easter Headwind Nearing - shorts bottoms


Athletic Apparel & FW: Easter Headwind Nearing - nke ua sweats


Athletic Apparel & FW: Easter Headwind Nearing - compression


Athletic Apparel & FW: Easter Headwind Nearing - apparel table


Athletic Apparel & FW: Easter Headwind Nearing - FW market share gaines


Athletic Apparel & FW: Easter Headwind Nearing - trends 1 yr


Athletic Apparel & FW: Easter Headwind Nearing - trends 2 yr



Recent data points from and pertaining to the casual dining space are cautious at best.  Keith sold Brinker today in the Hedgeye Virtual Portfolio.  His quantitative analysis corroborates our fundamental view of the stock.  Being Brinker Bulls has been kind to us since 2010, and those of our clients that got on board, but the stocks in this space trade in unison and due to our concerns about casual dining here and now, we must change with the facts.


Again, we have been positive on Brinker on all three durations (TRADE, TREND, TAIL) since mid-2010.  Following the company reporting 2QFY12 earnings, the stock sold off on concerns that top-line trends were suggesting that the company may not hit comparable restaurant sales targets for the full year.  While the stock has more than recovered from those concerns, we believe that the recent industry trends are likely to revive investor anxiety as the next catalyst, 3QFY12 EPS on 4/27. 


This upcoming quarter is the litmus test for Brinker.  At the outset of the quarter, we could see a plan that could bring Chili’s sales to the 3-4% (2% price, 1% mix, positive traffic) that will get the company back on track to meet 2% FY12 comparable restaurant sales guidance.  The most variable of the aforementioned components of the 3-4% comp is traffic.  Consistent with broader industry trends slowing into March and remaining soft in early April, our confidence in Chili’s traffic meeting our prior expectations has decreased.  Chili’s is not immune to the broader industry trends.


While Brinker’s balance sheet, generation of free cash flow, and operating margins are among the best in the industry and a testament to the fine job management has done over the last couple of years, comparable restaurant sales is the most important chapter of the turnaround story.  The street has been very unforgiving of the management team and we don’t expect investors to shrug off any top-line softness.


From a tail perspective, we believe that the improved operating platform at Chili’s will allow the chain to continue to take share.  Over the TRADE and TREND, however, we’d be selling here.


EAT - TRADE UPDATE   - eat levels



Howard Penney

Managing Director


Rory Green






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The slow road to recovery



The cruise industry remains on the road to recovery from all the freak incidents this year.  And their not exactly driving in the fast lane.  As CCL CEO Micky Arison reported yesterday in their annual shareholder meeting, March bookings ex Costa were up 3% in the five weeks to April 1 but pricing dropped 5% in the same period.  Meanwhile, Costa bookings in Europe were down "not as deeply" in the past few weeks as the face-ripping 75-80% drop after the Concordia incident.  Costa European pricing was still down by double-digits in the five-week period.    


Our March cruise pricing matrix below confirms these trends as cruise pricing continues to slack in 2012. 


Pricing Trends

  • Watch out for a double-whammy this summer.  While the Street continues to focus on lower prices in Europe, we are concerned of further pricing weakness in Alaska.  Alaska will have a particularly tough year given difficult comps.  Early April data shows deterioration in pricing for Alaska summer itineraries, which will hurt CCL more than RCL as CCL is more exposed to the region.  
  • The consumer wins.  Remember when Carnival CEO Arison said during the March conference call that consumers should quit waiting for lower prices in the Mediterranean?  Well, Costa finally relented on its fixed pricing and slashed prices 20-40% across the fleet.  RCL’s European fleet followed suit with +30% cuts across most of its ships.
  • Luxury continues to struggle.  Celebrity and Princess haven’t stopped dropping prices. Princess has been more aggressive in its pricing strategy.
  • Any good news? CCL’s Caribbean FQ2 bookings were solid.  South America/South Pacific FQ4 pricing was strong for RCL, which is a good sign since that region has the biggest presence during that quarter.




+/-           1-5%

++/--      5-10%

+++/---    >10%


(Prices are tracked relative to those on most recent company guidance)









Bearish TRADE: SP500 Levels, Refreshed

POSITIONS: Long Financials (XLF) and Utilities (XLU), Short Industrials (XLI)


Day 2 of the bounce doesn’t matter so much as the price level does. The SP500 needs to recapture its immediate-term TRADE line of 1391, and soon, or this market’s immediate-term price momentum is broken.


Volume is already broken, across durations, as fund flows are nowhere to be found. Volatility (VIX) just reminded people of the 2008, 2010, and 2011 moves from the Q1 VIX lows to the Q3 VIX highs.


Across my core risk management durations, here are the lines that matter most: 

  1. Immediate-term TRADE resistance = 1391
  2. Immediate-term TRADE support = 1352
  3. Intermediate-term TRADE support = 1331 

In other words, correcting to 1331 would be proactively predictable from this price since Growth Slowing has gone global.


Meanwhile, a close > 1391 = very bullish, and a close < 1331 = very bearish.




Keith R. McCullough
Chief Executive Officer


Bearish TRADE: SP500 Levels, Refreshed - SPX












Jobless Claims – Bad News for Casual Dining


Initial jobless claims came in at 380k versus 355k consensus for the week ended April 7.  The prior week’s tally came in at a revised 367k versus 357k prior.  Our view on casual dining is getting incrementally more bearish and we will be posting further thoughts on this soon. 


THE HBM: BK, BJRI, BNHNA, BWLD - initial claims



Commentary from CEO Keith McCullough


Japan is slowly, but surely, winding its way up the Keynesian pole to Most Read news (Bloomberg) next to Fed begging:

  1. JAPAN – the BOJ’s Shirakawa said exactly what we have been saying he’s ultimately going to have to say “The BOJ WILL PURSUE POWERFUL EASING” – that’s the go to Bernanke move (Policy to Inflate), and it stopped Japanese Equities from going down for the 1st day in 9 (+0.7%); Yen down on that obviously, but can go down a lot more
  2. EUROPE – certified train wreck in motion in Spain and Italy again with both stock markets following their respective bond markets (lower); Italian bond auction yielding 3.89% (vs 2.76% last) on 2015 notes – and get this, the Japanese say, hey, we have our own issues, we aren’t buying pig paper.
  3. US DOLLAR – sheepishly, the Fed’s Janet Yellen gave a speech in NYC last night that said what she always says – she’s all for devaluing the US Dollar until she’s told to retire. USD not moving much anymore on these comments; maybe because it hasn’t worked; maybe because political change is coming – we will see. Currency War is on.

SP500 needs to close > 1391 for any no volume rally to matter. 1 up day in the last 6 doesn’t a bull market make.






THE HBM: BK, BJRI, BNHNA, BWLD - subsectors





BK: Burger King got a write-up today in the WSJ, in an article focusing on the franchising trend in QSR.  John Gordon, a restaurant analyst, said that the problem with Burger King is that “the unit economics are so bad” … “because of bad store management over the past 40 or 50 years, you got all these beat up stores”.




SBUX: Starbucks gained 4.4% on accelerating volume.


MCD: McDonald’s underperformed after trading well, on a relative basis, over the two prior days’ down tapes.





BWLD: Buffalo Wild Wing’s will print comps in line with consensus, if Wingstop’s 1Q results are anything to go by (and the chart below suggests they are).  Consensus Metrix is indicating that consensus company-owned same-store sales for BWLD is 10.74%.





BJRI: BJ’s rated new “Overweight” at Barclays Capital.  The PT is $57 per share.


BNHNA: Benihana comps increased 6% in 1Q.  Increased traffic was credited with lifting the top line. 





Howard Penney

Managing Director


Rory Green



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