The Economic Data calendar for the week of the 2nd of July through the 6th 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:
“Not in my Lifetime”
Zee EU Summit concludes today. Interestingly, we saw quite a sustained relief rally today on the back of the statement’s release this morning [Italy +6.6%; IBEX +5.7%; Greece +5.7%; CAC +4.8%; DAX +4.3%; and EUR/USD +1.7% day-over-day]. While today’s rally doesn’t look dissimilar to rallies around releases of major bailout packages for Europe’s periphery since May 2010, we believe this rally will not have legs. Why?
Unfortunately, it’s both what today’s release didn’t address and intentionally dodged that confirms Europe is far from out of the dark crisis; the results are far from anything near a “bazooka” that could set markets on a sustained up trend. Keep in mind that today’s entire statement is three paragraphs long! It’s not that we’re looking for a 2-ton volume like the Dodd-Frank bill, but the release’s brevity leaves many river cards unturned. What’s missing?
The biggest concerns this time around include:
So what were the key components of the proposal?
And what are the key undefined points and question marks?
Returning to the title of this note, “Not in my Lifetime” (Nicht zu meinen Lebzeiten), which is the phrase Frau Merkel utter this week dismissing “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.
Her positioning portends that Eurocrats will remain at loggerheads over Europe’s path forward. Europe is running out of bullets in our opinion to save the Eurozone project short of the ECB stepping in to play a larger role. However, we must return to our most basic outlook which is that excessive debt loads are one main problem across peripheral Europe. Growing debt only further impairs and slows growth, a point proven by history according to the seminal work of Reinhart and Rogoff.
Switching gears, it was a second straight week that saw peripheral yields and risk metrics (CDS) come in, while new peripheral sovereign paper was issues at significant premiums (vs pervious auctions as recent as last month), and data—including confidence figures and retail sales—slid to the downside! [See below in Data Dump].
Below is an updated EUR/USD price level chart. Our immediate term TRADE support is $1.24 and resistance is $1.26. Today’s Summit release sent the price through our $1.26 line. We’ll be monitoring this level closely to confirm or deny aninflection. Our intermediate term TREND support level remains at $1.23. Our call is that if $1.23 breaks, look out below! We’re not EUR parity folks because we see Eurocrats stepping in to prevent it.
ECB - A Reuters poll found 48 out of 71 analysts expect the central bank to cut rates next week, most of them forecasting a 25 basis point cut to 0.75%. Benoit Coeure said last week cutting rates was an option and one that would be discussed at the ECB's 5 July meeting.
Italy - Italy’s business lobby sees GDP at -2.4% and -0.3% in 2012/2013 (down from -1.6% and +0.6%).
Spain - Rajoy “we can’t finance at current prices for too long” and “many institutions have no market access”.
UK - Barclays Plc was fined 290 million pounds, the largest penalties ever imposed by regulators in the US and UK, after admitting it submitted false London and euro interbank offered rates.
Germany - Egan Jones Downgraded Germany From AA- To A+.
France - France's government will increase the minimum wage by more than inflation this year for the first time since 2006, in the hope that stronger consumption will revive the country's ailing economy.
Spain - Moody’s downgraded 28 Spanish banks (12 cut to junk) citing the sovereign downgrade earlier this month as well as the possibility that commercial real estate losses will worsen.
EU - is losing around €1 trillion a year in tax evasion. The EU Commission is calling on the 27-nation bloc to improve tax collection nationally, boost cooperation between EU countries in fighting tax fraud and increase pressure on tax havens outside the EU to limit tax evasion. Draft proposals include making taxes simpler with the ability to deal with them online and that EU countries should have the same minimum penalties for tax evasion, so that fraudsters cannot choose less risky locations.
Slovenia - may ask for a bailout in July says PM Janez Jansa.
Greece - Greek Finance Minister Vassilis Rapanos resigned for health reasons.
Cyprus - becomes the 5th Eurozone nation to request EU aid, with initial figures projected at up to €10B.
Cyprus - Fitch Ratings cut Cyprus’s credit rating to junk status at BB+ from BBB- and maintained a negative outlook on the nation’s rating, citing expectations that Cypriot banks will need further, substantial capital injections. Fitch said that in addition to the €1.8B required to recapitalize Cyprus Popular Bank, the country’s banks could require as much as an additional €4B in additional capital — an amount equal to 23% of the tiny country’s GDP.
CDS Risk Monitor:
Sovereign CDS were down on the week. Ireland saw the largest decline in CDS w/w at -43bps to 582bps, followed by Portugal -39bps to 808bps, Spain -17bps to 552bps, and Italy -1bps to 508bps. Germany rose +5bps to 104bps.
Eurozone Business Climate indicator -0.94 JUN vs -0.79 MAY
Eurozone Consumer Confidence -19.8 JUN Final vs -19.3 MAY
Eurozone Economic Confidence 89.9 JUN vs 90.5 MAY (lowest level since 2009)
Eurozone Industrial Confidence -12.7 JUN vs -11.4 MAY
Eurozone Services Confidence -7.4 JUN vs -5.2 MAY
Germany CPI 2.0% JUN Preliminary Y/Y (exp. 2.1%) vs 2.2% MAY [-0.2% JUN M/M (exp. -0.1%) vs -0.2% MAY]
Germany Unemployment Rate 6.8% JUN (exp. 6.7%) vs 6.8% MAY (revised up from 6.7%)
Germany Unemployment Change 7K JUN vs 1K MAY
Germany GfK Consumer Confidence 5.8 JUL vs 5.7 JUN
UK Q1 GDP Final UNCH -0.3% Q/Q
UK Q1 GDP Final revised to -0.2% Y/Y vs -0.1% previous estimate
UK Nationwide House Prices -1.5% JUN Y/Y (exp. -0.6%) vs -0.7% MAY [-0.6% JUN M/M (exp. 0.1%) vs 0.2% MAY]
France Consumer Confidence 90 JUN vs 90 MAY
Spain Total Housing Permits -32.4% APR vs -27.8% MAR
Spain CPI 1.8% JUN Prelim Y/Y vs 1.9% MAY
Spain Producer Prices 3.2% MAY Y/Y vs 3.0% APR
Spain Retail Sales -4.3% MAY Y/Y vs -11.5% APR
Italy Retail Sales -6.8% APR Y/Y vs 1.5% MAR
Italy Business Confidence 88.9 JUN vs 86.6 MAY
Italy CPI 3.6% JUN Prelim Y/Y vs 3.5% MAY
Italy PPI 2.3% MAY Y/Y vs 2.5% APR
Sweden PPI 0.3% MAY Y/Y vs 0.0% APR
Sweden Retail Sales 4.6% MAY Y/Y (exp. 3.8%) vs 0.5% APR
Norway Unemployment Rate 3% APR vs 3% MAR
Finland Consumer Confidence 5.8 JUN vs 12.0 MAY
Finland Business Confidence -6 JUN vs -9 MAY
Finland Unemployment Rate 9.5% MAY vs 8.4% APR
Switzerland UBS Consumption Indicator 1.05 MAY vs 1.37 APR
Ireland Retail Sales -2.1% MAY Y/Y vs -1.8% APR
Ireland Property Prices -15.3% MAY Y/Y vs -16.4% APR
Ireland PPI 2.0% MAY Y/Y vs 2.8% APR
Portugal Consumer Confidence -51.5 JUN vs -52.6 MAY
Portugal Economic Climate Indicator -4.4 JUN vs -4.6 MAY
Hungary Unemployment Rate 11.2% MAY vs 11.5%
Slovakia PPI 4.2% MAY Y/Y vs 3.8% APR
Slovakia Consumer Confidence -22.6 JUN vs -22.5 MAY
Slovakia Industrial Confidence 2 JUN vs 2.7 MAY
Netherland Q1 GDP Final -0.8% Y/Y vs -0.8% in Q4 [+0.3% Q/Q vs -0.6% in Q4]
Netherlands Producer Confidence -4.8 JUN vs -5.0 MAY
Czech Republic Business Confidence 4.6 JUN vs 6.0 MAY
Czech Republic Consumer and Business Confidence -2.2 JUN vs -1.4 MAY
Czech Republic Consumer Confidence -29.3 JUN vs -31.0 MAY
Turkey Foreign Tourist Arrivals -1.5% MAY Y/Y vs -5.3% APR
Interest Rate Decisions:
(6/26) Hungary Base Rate UNCH at 7.00%
(6/27) Romania Interest Rate UNCH at 5.25%
(6/28) Czech Repo Rate Announcement CUT to 0.50% vs 0.75%
The Week Ahead:
Sunday: The ESM is set to come into force
Monday: Eurozone Troika will likely start on its mission to Cyprus; Jun. Eurozone, Germany, and France PMI Manufacturing - Final; May Eurozone Unemployment Rate; Jun. UK Lloyds Business Barometer, PMI Manufacturing; Jun. Italy PMI Manufacturing; May Italy Unemployment Rate – Preliminary, New Car Registration, Budget Balance; Spain and Italy Manufacturing PMI
Tuesday: May Eurozone PPI; Jun. UK PMI Construction, BRC Shop Price Index; May UK Net Consumer Credit, Net Lending Sec. on Dwellings, Mortgage Approvals, Money Supply: Jun. Spain Unemployment
Wednesday: Jun. Eurozone PMI Composite and Services - Final; May Eurozone Retail Sales; Jun. Germany PMI Services – Final; Jun. UK PMI Services, Official Reserves; 1Q UK BoE Housing Equity Withdrawal; France Prime Minister Ayrault is poised to submit new adjusted budget to his cabinet; Jun. France PMI Services – Final; Spain Services PMI; Jun. Italy PMI Services; 1Q Italy Deficit to GDP; Sweden Riksbank Interest Rate
Thursday: Eurozone ECB Announces Interest Rates; May Germany Factory Orders; UK BoE Announces Rates; Jul. UK BoE Asset Purchase Target; Jun. UK New Car Registration
Friday: May Germany Industrial Production; Jun. UK PPI Input and Output; May France Central Government Balance, Trade Balance; May Spain Industrial Output
Extended Calendar Call-Outs:
JULY: France – extraordinary session of parliament in July is due to re-draft the 2013 budget
9 July: ESM to come into force
5 July: ECB governing council meeting
19 July: ECB governing council meeting
18-19 October: Summit of EU Leaders
Wendy’s is a company heading in the right direction but we would look elsewhere for exposure to the QSR category at this point in time. We anticipate the stock continuing to trade in the $4.50 - $5.50 range that it has been in for the last three years until management provides investors with clearer guidance as to the timeline for the system reimaging to reach completion.
President and CEO Emil Brolick, CFO Steve Hare, CMO Craig Bahner, SVP of Strategic Initiatives and Planning Abigail Prince, and others presented at the Wendy’s Investor Day yesterday in Dublin, Ohio. Hosting its second Investor Day this year, the company was expected to share good news and that came in the form of a preannouncement of +3% same-store sales growth for 2Q at company stores versus expectations of 1.5%, according to Consensus Metrix. McDonald’s same-store sales growth slowing has definitely been picked up by other domestic QSR chains, including Wendy’s. However, we have not seen participate in any rally in QSR stocks over the past number of years. The second chart, below, highlights the price action in the stock versus domestic QSR competitors over the past nine months; we believe that a lack of visibility on cash flow is keeping investors on the sidelines.
The Crux of the Debate
Our view remains that gaining clarity on the timeline for the system to go through the reimaging process is essential before establishing an intermediate- or long-term position in the stock. The company’s priority is shifting from dividends and share repurchases to “strategic investment” related to the brand revitalization. The company offered a timeline for reimaging 50% of the company-owned restaurants by the end of 2015 (70% of the company-owned stores need reimaging longer term) but no such specificity was offered with respect to the franchised portion of the system (~78% of total restaurant count). We see several unresolved components to this story that will keep us on the sidelines until the facts change.
Below, we address several key takeaways from the meeting:
Reimaging: CFO Steve Hare presented what, to us, was the most important part of the presentation as he offered some details around what management expects the financial implications of the reimaging initiative to be.
This could all play out as Mr. Hare outlined but we think there is too much risk to the company’s assumptions to place capital behind them at this point in time. For instance, franchisees’ enthusiasm for the reimaging program will likely depend on negotiations between corporate and the franchise community; royalty relief and other options will surely be discussed. Recent conversations we have had with prominent members of the franchisee community have expressed concerns about the “eye-popping” numbers involved in the reimaging program. Such concerns may prolong the process. The benefits of the reimaging program, it seems, will need to be proven over a broader span of time and a larger number of restaurants before franchisees join the effort en masse. The reimaged Bethel Road, Dublin, prototype location that we visited on Wednesday night reopened its doors 10 months ago in a core Wendy’s market. While the ~$700k sales lift on the restaurant was impressive, we believe that the franchisees we have spoken to will seek further evidence that a positive yield can be expected from any investment they make in the reimaging initiative.
The next meeting between management and the company’s franchisees, in October, is the next major milestone for the long-term Wendy’s story. The support of the franchise community is important for the company to attain the benefits of the reimaging program. Management believes that when 35-40% of dominant marketing areas have reimaged the restaurants, the long-term improvement in traffic should become material.
Cash Priority Shifting: Management is changing its focus to reimaging and reinvestment in the brand.
Marketing: Wendy’s has picked up its marketing game from non-existent to evidently effective over the last few quarters and the results, of 3% positive comps in 2Q, are clear for all to see.
Stinky Carpets: Good food is important and it was encouraging to see the distinctive new offerings Wendy’s is bringing to the consumer. As Emil Brolick admitted to a group of analysts at a lunch in New York shortly after he was appointed CEO, increasing traffic in the lobby depended very much on the asset base being upgraded; essentially, (our words) stinky carpets will lessen the appeal of new food offerings. Management recognizes this and rightly asserts that the asset base should not preclude the company from leading in terms of product. We agree, but believe that the broader system will continue to struggle versus major competitors in terms of traffic until the reimaging process reaches a satisfactory run rate.
Breakfast Yet to Leave the Station: The company has a strong pipeline of breakfast products and its coffee sales have grown encouragingly (up 25% since rollout of “Red Headed Roasters”). 22% of QSR traffic occurs during breakfast and the day part represents all of the growth in QSR over the last 5 years. Wendy’s is missing out on the only rising tide in the industry and is forced to battle it out with competitors for traffic growth in other day parts. The product, for what it’s worth, seemed very competitive to us but is real estate a problem? Are the stores on the wrong side of the Street? Are franchisees going to want to roll out breakfast while so many other changes are taking place? We don't know the answer to these questions but that they persist is a concern in and of itself.
Wendy’s has a great management team that is aware of the challenges it faces. That said, this Investor Day was loaded with statements that hinge on many uncertain factors. If, for lack of available details, we conservatively assume that the average reimage will cost $500k, it would imply $2.6 billion of investment required to revitalize the franchised portion of the asset base. Reimaging remains a dark cloud hanging over the Wendy’s story and we expect the stock to remain range-bound until investors gain more visibility as to the timeline and the cost associated with this core component of the brand revitalization effort. There will be a time to get behind this stock but, for the foreseeable future, we will stay on the sidelines until we gain clarity on the company’s timeline and future cash flow generation.
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Nike (NKE) reported its FYQ4 results yesterday and missed the Street consensus by a whopping $0.20. Essentially, it was a total wash and Nike put up one awful print. This is a company that has continued to grow quarter-over-quarter for the past few years up until 2012. Gross margins were off management’s projections for the third quarter in a row. Plain and simple: Nike messed up and management knows it simply cannot screw up next quarter. The board will not allow it.
To put it in perspective, the company had several factors affecting the outcome of its earnings report. Higher R&D costs, a negative customs ruling for four years of imports and gross margins hovering at a 2004 level. And consistent with our macro outlook, growth in China slowed to abysmally low levels, but it can be argued that was to be expected. Furthermore, management’s tone on the conference call displayed a laid back attitude that does not bode well for a company posting a miss like Nike did. In short, it’s time to hunker down and focus.
Despite yesterday’s horrid earnings report, we do remain bullish on the stock over the long-term. Capital expenditures are leveling off, the new NFL contract will grow into a half-a-billion dollar business in about two years, and the sale of Cole Haan and Umbro (both of which Nike had no business owning) will generate cash to play with.
POSITIONS: Short Industrials (XLI) and Energy (XLE)
So the SP500 went up 41 handles in less than 2.5 hours of trading, and everyone nailed both sides, right?
This is obviously getting out of control, and anyone who doesn’t realize that probably didn’t in Q3 of 2008 either. No, this is not 2008. This is 2012, and Q3 starts Monday.
Across my core risk management durations, here are the lines that matter most:
In other words, what was a hyper short-term TRADE line of resistance (1335) is now support, and I fully expect to test this 1 wall of resistance. When/if the market fails at the wall, the central planners are going to need another central plan.
Maybe today is a fun one for politicians. That’s just great, for them. Their behavioral similarities to 2008 are mounting, by the week.
Enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – June 29, 2012
As we look at today’s set up for the S&P 500, the range is 17 points or -0.68% downside to 1320 and 0.60% upside to 1337.
SECTOR AND GLOBAL PERFORMANCE
CREDIT/ECONOMIC MARKET LOOK:
TREASURIES – US Treasury Bonds continue to be the only sober asset class not being whipped around by central planning headlines. At 1.62% this morning, yields haven’t budged (the 10yr is actually down 5bps on the wk and the Yield Spread (10s/2s) is 6bps narrower. More bailouts only slow growth further; that will be obvious in July/August.
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
EURO – get the EUR/USD right, you get all the Correlation Risk trades right – and that’s pretty much the biggest reason why everything from Copper to the Spanish IBEX are ripping. At +1.2% the Euro is having one of its biggest up days of Q2 here, so that is going to train wreck anyone who nailed the quarter, on the last day of the quarter. Nice.
GERMANY – probably the most important lines to watch are Euro $1.26 (immediate-term TRADE resistance) and DAX 6251 (immediate-term TRADE line); for the DAX, holding above that line would be as bullish as it looked bearish below the line only 24hrs ago. Guys running billions can probably flip their entire book upside down in 24hrs, right?
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