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Weekly European Monitor: Shorting France and Buying Bunds

European Positions Update: Short France (EWQ); Long German Bunds (BUNL); Sold Germany (EWG) on 4/12

 

Asset Class Performance:

  • Equities:  The STOXX Europe 600 finished down -2.2% week-over-week vs -1.6% last week. Bottom performers: Italy -5.8%; Spain -5.4%; Finland -4.9%; Hungary -4.6%; France -3.8%; Denmark -3.0%. Top performers:  Cyprus +2.8%; Greece +0.8%; Russia (MICEX) +0.6%.  
  • FX:  The EUR/USD is down -0.18% week-over-week.  W/W Divergences: PLN/EUR -0.54%, SEK/EUR -0.39%, HUF/EUR -0.28%
  • Fixed Income:  Greek 10YR bond yields fell -107bps week-over-week, versus a gain of similar magnitude last week.  Most other countries were relatively flat week-over-week. Portugal led the charge +32bps to 12.55%, followed by Spain (+8bps) to 5.88%. Italy fell -7bps to 5.42%.

Weekly European Monitor: Shorting France and Buying Bunds - aa. yields

 

 

Portfolio: Short France (EWQ); Long German Bunds (BUNL)


Keith shorted France (EWQ) and bought German Bunds (BUNL) in the Hedgeye Virtual Portfolio yesterday (4/12). The moves are a continuation of our thinking about Europe: there’s a relative advantage to playing the capital markets of the stronger countries on the long side and weaker countries on the short side, at a price. We’re highly sensitive to price and well aware that there’s no simple equation to pair or hedge risk in Europe: political headline risk, even from the tiniest of countries in Europe, can roll country equity indices and influence yields across the continent.  And we don’t expect this trend to change. Namely, we expect Eurocrats to continue to behave in a reactive manner, with the next call likely being the re-engagement of the SMP, which has been dormant for the last four weeks. This program may help to reduce the recent spike in sovereign yields and rise in CDS, yet does little to address the larger box the Eurozone is trapped in. That said, we’ve yet to see a disruption in the tight trading band of the EUR/USD of $1.30 - $1.34. We recommend trading the range, until further notice.

 

The timing of our short France position also plays into Sunday’s first of two French presidential election votes and increased fear around the sovereign and banking risk of Spain. The incumbent Nicolas Sarkozy is favored to win the first vote versus Socialist candidate Francois Hollande; however Hollande is expected to win the deciding second vote 53% to 47% according to an Ifop-Fiducial poll published on April 6th.  What’s broadly clear is that both candidates plan to increase taxes and impose fees on financial transactions.  Both have declared to reduce the country’s deficit to 0% (as a % of GDP), Hollande by 2017 and Sarkozy by 2016.  Both guide to reduce the deficit to 3% by 2013 versus 5.3% in 2011.

 

However, Hollande has signaled an even more socialist agenda, which we think should result in the inability of the state to meet its deficit and debt reduction targets. Hollande wants to increase spending by €20 MM over five years (by repealing €29 MM of tax breaks and generating revenue by separating retail and investment bank operations and raising the income tax on earners over €1 MM to 75%) and reduce the retirement age to 60 from 62.  With the country’s debt rising to the 90% level, we expect growth to be compressed, as proven by the work of Reinhart and Rogoff.

 

Simply put, the CAC has run well ahead of peer indices and has room to revert. The CAC is at 0.9% year-to-date, while the Spanish IBEX is down -15.4% YTD.

 

Weekly European Monitor: Shorting France and Buying Bunds - aa. ewq

 

With respect to our position on German Bunds, we bought BUNL on a pullback, and continue to like Germany's employment and fiscal situation, which is much more tolerable than America’s right now and most of the Eurozone. Germany, across the capital markets, continues to signal a relatively safer bet.

 

Weekly European Monitor: Shorting France and Buying Bunds - aa. bunl


 

Call Outs:


SMP - European Central Bank Executive Board member Benoit Coeure suggested that the bank could revive its bond-purchase program to reduce Spain’s borrowing costs: “We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”

 

Spain - borrowed €227.6B from the ECB in March, up €75B versus February, the same amount Italy borrowed in March.

 

Portugal - Dependence of the Portuguese banking system on the ECB rose to a record high in March, as banks took advantage of easier borrowing conditions: Bank of Portugal said domestic banks' use of the ECB's various credit facilities rose to €56.32 billion in March from €47.55 billion in February.

 

Switzerland - “The Swiss National Bank is enforcing the minimum exchange rate with all the means at its disposal,” SNB President Thomas Jordan told reporters at a press briefing today. “We are prepared to buy foreign currency in unlimited quantities for this purpose. In this respect, our policies are totally unchanged.”

 

Italy – Bond auction come in with higher yields. The bank sold €8.0B in 12-month bills with an average yield of 2.840% vs 2.392% prior; and €2.884 billion of 3YR bonds vs a €3 billion max target with a yield of 3.89% vs 2.76% previously.

 

EUR/USD - Most-accurate foreign-exchange forecasters say the euro will slide as austerity-driven spending cuts from Spain to Italy reignite debt turmoil and drag the region into recession

  • Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., expects the euro to drop more than 5% to $1.24 at the end of 2012.
  • Westpac Banking Corp., which had the second-lowest margin of error, predicts $1.26.

 

 

CDS Risk Monitor:

 

Week-over-week Spain saw the largest gains in CDS, +12bps to 487bps, while the other countries we follow were relatively flat.  Ireland flashed an inflection, down -16bps to 589bps. 

 

Weekly European Monitor: Shorting France and Buying Bunds - aa. cds   a

 

Weekly European Monitor: Shorting France and Buying Bunds - aa. cds   b

 


Data Dump:


Eurozone Industrial Production -1.8% FEB Y/Y vs -1.7% JAN

Eurozone Sentix Investor Confidence -14.7 APR (exp. -9.1) vs -8.2 MAR

 

Germany CPI 2.3% MAR Y/Y vs 2.5% FEB

Germany Exports 1.6% FEB M/M (exp. -1.2%) vs 3.4% JAN

Germany Imports 3.9% FEB M/M (exp. 1.3%) vs 2.4% JAN

Germany Wholesale Price Index 2.2% MAR Y/Y vs 2.6% FEB   [0.9% MAR M/M vs 1% FEB]

 

UK PPI Input 1.9% MAR M/M (exp. 1.4%) vs 2.5% FEB   [5.8% MAR Y/Y (exp. 4.8%) vs 7.8% FEB]

UK PPI Output 0.6% MAR M/M  (exp. 0.5%) vs 0.6% FEB    [3.6% MAR Y/Y (exp. 3.5%) vs 4.1% FEB]

 

France Bank France Business Sentiment 95 MAR vs 95 FEB

France Industrial Production -1.9% FEB Y/Y (exp. -1.2%) vs -1.9% JAN

France Manufacturing Production -3.7% FEB Y/Y (exp. -1.7%) vs -1.7% JAN

France CPI 2.6% MAR Y/Y vs 2.5% FEB

Italy Industrial Production -3.5% FEB Y/Y vs -1.7% JAN

 

Spain House Transactions -31.8% FEB Y/Y vs -26.3% JAN

Spain Industrial Output -3% FEB Y/Y vs -2.5% JAN

Spain CPI 1.8% MAR Y/Y vs 1.9% FEB

 

Sweden Industrial Production -7.1% FEB Y/Y vs 1.7% JAN

Sweden CPI  1.5% MAR Y/Y vs 1.9% FEB

Switzerland Unemployment Rate 3.1% MAR (UNCH)

 

Norway Industrial Production 3.1% FEB Y/Y vs 3% JAN

Ireland Consumer Confidence 60.6 MAR vs 57 FEB

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

Ireland Industrial Production -3% FEB Y/Y (exp. -0.5%0 vs -0.2% JAN

Finland CPI 2.9% MAR Y/Y vs 3.1% FEB

 

Greece Industrial Production -8.3% FEB Y/Y vs -5% JAN

Greece CPI 1.7% MAR Y/Y vs 2.1% FEB

Greece Unemployment Rate 21.8% JAN vs 21% DEC

 

Portugal Industrial Sales 0.7% FEB Y/Y vs 2.9% JAN

Portugal Construction Works Index 61.4 FEB vs 63.2 JAN

Portugal CPI 3.1% MAR Y/Y vs 3.6% FEB

 

Russia Light Vehicle and Car Sales 13% MAR Y/Y vs 25% FEB

Turkey Industrial Production 4.4% FEB Y/Y (NSA) vs 1.5% JAN

Hungary Consumer Prices 5.5% MAR Y/Y vs 5.9% FEB

Hungary Industrial Production -3.4% FEB Y/Y vs -2.7% JAN

 


Interest Rate Decisions:


(4/9) Russia - Bank Rossii left the refinancing rate UNCH at 8.00%; overnight auction-based repurchase rate UNCH at 5.25%; and the overnight deposit rate UNCH at 4.00%.

 

(4/12) Serbia Interest Rate UNCH at 9.50%

 

 

The European Week Ahead:


Sunday: Apr. UK Rightmove House Prices

 

Monday: Feb. Eurozone Trade Balance; Moody's Completes Review of 24 Italian Bank Ratings (Decision on Apr 20); Feb. Italy Trade Balance, General Government Debt

 

Tuesday: Apr. Eurozone Zew Survey Economic Sentiment; Mar. Eurozone New Car Registrations, CPI; Apr. Germany Zew Survey Current Situation and Economic Sentiment; Mar. UK CPI, RPI; Feb. UK House Prices; Feb. Italy Current Account

 

Wednesday: Feb. Eurozone Current Account, Construction Output; UK BoE Minutes; Mar. UK Claimant Count Rate, Jobless Claims Change; Feb. UK Avg Weekly Earnings, ILO Unemployment Rate; 1Q Spain House Price Index; Feb. Spain Trade Balance; Sweden Riksbank Interest Rate

 

Thursday: Group Meeting of 20 Deputy Finance Ministers (Apr 19-22); Apr. Eurozone Consumer Confidence – Advance; Feb. Italy Industrial Orders and Sales; Feb. Greece Current Account

 

Friday: Annual Spring Meeting of the IMF/World Bank (Apr 20-22); Mar. Germany Producer Prices, IFO Business Climate, Current Assessment, and Expectations; Mar. UK Retail Sales

 

Sunday: First round of the French Presidential Election

 

 

Extended Calendar Call-Outs:


22 April:  French Elections (Round 1) begins, to conclude in May.

 

29 April, 6 or 13 May:  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


Retail Thinking It Can Grow Again?

Retail employment levels continue to make higher highs and higher lows as the CPI for apparel continues to grind higher. This is both on a stand-alone basis, and relative to the rest of the US employment picture. It's as if the industry is starting to believe it can grow again.

 

We'll be careful not to compare apples and oranges, as the Monster employment index also includes Auto, Food and Hardlines retail. But retail wages don't change a whole heck of a lot whether an employee is selling socks, X-Boxes, or windshield wiper blades. But with employment higher in conjunction with consumer prices, it suggests that retailers are getting more bold (or less cautious) with hiring activity. 

 

The March numbers were the easiest employment compares of the year, and the become precipitously more difficult starting in April.

 

This will be an increasingly important trend for us to watch effective immediately, especially given the Gross Margin pressure that we think will come in 2H due to changes in the competitive landscape.

 

Retail employment is making higher highs and higher lows

Retail Thinking It Can Grow Again? - 2

 

...even relative to the rest of retail.

Retail Thinking It Can Grow Again? - 4 13 2012 2 40 17 PM

 

 

...while consumer prices grind higher.

Retail Thinking It Can Grow Again? - 3

 

 

 


REPLAY PODCAST & SLIDES: 2Q12 MACRO THEMES

Earlier today, the Hedgeye Macro Team, led by CEO, Keith McCullough, and DOR, Daryl Jones, hosted its 2Q12 Macro Themes Call.

 

Topics included:   

  • The Last War: Fed Fighting - We take a historical look at U.S. Federal Reserve policy to contextualize the impact of Ben Bernanke's Policy to Inflate, Extend & Pretend rock-bottom interest rates, and Burn the Buck on the broader economy and financial markets from Main Street to Wall Street.
  • Bernanke's Bubbles - A highlight of the top ten leverage price bubble charts perpetuated and encouraged by The Bernank's policy stance.
  • Asymmetric Risks - In a macro environment of slow global growth and historically low interest rates we present asymmetric risks to capitalize on over the intermediate term. Low equity market volatility is but one signal of what's ahead for investors. 

To access the replay podcast and the presentation materials, please copy/paste the following two links into the URL of your browser:

Have a great weekend, 

 

The Hedgeye Macro Team


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DIAL IN & MATERIALS: 2Q12 MACRO THEMES AND PRESENTATION

Valued Client,

  

5-10 minutes prior to the 11AM EST start time please dial:

 

(Toll Free) or (Direct)

Conference Code: 135512#

  

Materials: http://docs.hedgeye.com/Q22012.pdf

                  

To submit questions for the live Q&A, please email

 

******************************************************************************  

 

Today Friday, April 13th at 11am EST, the Hedgeye Macro Team, led by CEO, Keith McCullough, and DOR, Daryl Jones, will be hosting our 2Q12 Macro Themes Call.

 

Topics will include:   

  • The Last War: Fed Fighting - We take a historical look at U.S. Federal Reserve policy to contextualize the impact of Ben Bernanke's Policy to Inflate, Extend & Pretend rock-bottom interest rates, and Burn the Buck on the broader economy and financial markets from Main Street to Wall Street.
  • Bernanke's Bubbles - A highlight of the top ten leverage price bubble charts perpetuated and encouraged by The Bernank's policy stance.
  • Asymmetric Risks - In a macro environment of slow global growth and historically low interest rates we present asymmetric risks to capitalize on over the intermediate term. Low equity market volatility is but one signal of what's ahead for investors. 

Please contact if you have any questions. As always, the replay podcast will be made available shortly after the call.

  

Regards, 

 

The Hedgeye Macro Team


THE REGIONALS: Q1 THOUGHTS

Could be a mixed bag but given the calendar and weather, they should’ve done better.

 

 

Given the favorable Q1 calendar, we thought the regional markets would’ve performed better.  With the exception of BYD and maybe PNK, Q1 earnings/EBITDA are likely to come in-line or even down for the regional gaming operators.  Q1 contained 3 extra weekend days, 91 days overall, due to Leap Year, and the weather was fantastic.  Remember that the Midwest was hammered with snowstorms last year in Q1.

 

THE REGIONALS: Q1 THOUGHTS - 33

 

BYD

 

BYD looks like the standout for Q1.  The Street’s $125 million EBITDA estimate looks light by about 5%.  We are still awaiting Louisiana’s results but it’s hard to imagine they will move the needle enough to prove the Street correct.  While BYD’s regional properties mostly had decent Q1s, the big properties made the difference this quarter – LV locals, Borgata, and even Downtown LV.  On an EPS basis, the Street is at $0.08, guidance was for $0.05-0.09, but we think $0.11 is more likely.

 

ASCA

 

ASCA looks like the loser this quarter.  We think the company could miss EBITDA expectations by $2 million for Q1 and EPS by $0.03.  ASCA is a good operator with well maintained, quality facilities.  However, we think they are more a victim of sluggish market conditions, new competition in the Kansas City market, and high gas prices. 

 

PNK

 

Louisiana supplies most of PNK’s EBITDA and since that state hasn’t reported March gaming revenues yet, it’s difficult to make a call on Q1 earnings.  Their other properties appear to be tracking ahead of the Street.  It’s subject to change, but we think Q1 EBITDA could come in 2-3% higher than the Street’s $68 million estimate and EPS 1c above the Street’s $0.20 EPS estimate.  River City has been the positive differentiator so far.

 

PENN

 

PENN looks in-line to us, which is actually a disappointment.  After a better than expected January and February, PENN was cruising for a sizable beat.  March was weak for them, particularly in Illinois where they have too much exposure, and in Kansas City.  Their new property in Kansas has experienced disappointing results in its first two months while cannibalization of their Riverside casino on the Missouri side has been higher.  


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