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Weekly European Monitor: ESM (and European) “Clarity” Pushed Out

-- For specific questions on anything Europe, please contact me at to set up a call.


No Current Positions in Europe


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +0.6% week-over-week vs +1.3% last week. Top performers: Cyprus +3.3%; Romania +2.9%; Norway +2.1%; Slovakia +2.0%; Germany +2.0%; Portugal +2.0%; Netherlands +1.3%. Bottom performers: Greece -2.7%; Spain -1.4%; Czech Republic -1.3%; Poland -1.2%.
  • FX:  The EUR/USD is down -0.50% week-over-week vs -3.14% last week.  W/W Divergences: RUB/EUR +1.25%; PLN/EUR +1.20%; CZK/EUR +1.19%; GBP/EUR +0.75%; NOK/EUR +0.71%; SEK/EUR +0.28%; CHF/EUR +0.03%; DDK/EUR -0.01%.
  • Fixed Income:  10YR Yields were mixed to down across the countries we track. Week-over-week, Greece’s 10 YR yield declined -51bps to 25.22%, followed by Spain at -34bps to 6.66%. French and Belgian yields both dropped -19bps to 2.22% and 2.66%, respectively.  Portugal was a notable outlier to the upside, gaining +35bps to 10.56%. Italy was relatively flat on the week, declining -5bps to 5.99%.  

Weekly European Monitor: ESM (and European) “Clarity” Pushed Out - aaa. yields


ESM (and European) “Clarity” Pushed Out:


I encourage you to read Friday’s Early Look titled “Crumble Cake Europe” in which I step back to assess the Eurozone’s political landscape in the context of the on-going “crisis”, including the implications for the common currency. In short, given the German Constitutional Court’s lack of decision on the ESM and fiscal compact this week—and a follow-up statement from Finance Minister Wolfgang Schaeuble that a decision may not come until the Fall—there’s potentially a long runway of indecision on the bailout facility and the lack of scheduled Summits (i.e. catalyst) over the summer leaves a lot of uncertainty on the table, including Spain’s bank bailout that hangs on both the EFSF and ESM (which was scheduled to be operation on July 1) and the firepower behind the Eurozone’s bailout facility, as the EFSF has only €120-220B remaining, depending if you factor in Spain’s bank bailout or not.


As we show in the chart below, the EUR/USD cross broke our intermediate term TREND Line of $1.22 this week and is nearing 2010 lows, back when Greece received its first bailout in May.  We see the cross as a relative loser until more decisive action is taken from Eurocrats.


Weekly European Monitor: ESM (and European) “Clarity” Pushed Out - aaa. EUR



Call Outs:


Spain - PM Rajoy announced budget measures worth €65B over 2.5 years this morning (VAT will rise to 21% vs 18%).  He also announced a reduction in unemployment benefits, the elimination of the year-end bonus for some public workers, the consolidation of local governments and the scrapping of a tax rebate for home buyers. Rajoy also said that he may privatize airport, railway and port assets.


Germany - The country’s Constitutional Court ended its hearing on the ESM and fiscal pact and did not give a date for a ruling, but Finance Minister Wolfgang Schaeuble says he hopes it will come before the fall. 


Norway - The Norwegian government stepped in at the last minute to force arbitration and avert a lockout of ~ 6,500 offshore oil workers. 


Eurozone - Finance Ministers announced further details around the €100 billion plan to recap Spanish banks.  Under terms of the “political understanding” - €30 billion will be released by the end of the month via Spain’s existing FROB (on Spain’s balance sheet). 


European Commission - Will propose easing Madrid's deficit goal for this year to 6.3% of economic output (versus a previous target of 5.3%), and 4.5% in 2013 (versus 3%) and 2.8% for 2014.


Greece - Deposits in Greece’s banking system have increased by more than €8 billion since the government formed.


Italy - Prime Minister Monti ruled out running for office when his term ends next fall. He also reiterated that Italy may want to tap the Eurozone bailout mechanism to help lower its borrowing costs.


Ireland - The Financial Times, citing an interview with Irish Finance Minister Michael Noonan, reported that Dublin will unveil a multi-billion euro stimulus package later this month in an effort to boost its economy and reduce unemployment.


ECB - ECB on Thursday showed that banks held €324.9B in the ECB's overnight facility on Wednesday, the first day that the central bank's recently announced zero deposit rate went into effect, down from €808.5B on Tuesday.


Italy - Moody’s downgraded Italy's government bond rating to Baa2 from A3.


France - European Affairs Minister Bernard Cazeneuve said that France is ready to cede sovereignty to its European partners if it helps to bolster the tolerance for debt mutualization.


Risk Monitor:

The move in sovereign CDS was mixed on the week. Portugal fell -18bps to 835bps week-over-week, followed by Germany at -13bps to 87, France -12bps to 173bps, and Italy -9bps to 505bps.  Ireland rose 18bps to 551bps and Spain was flat on the week. 


Weekly European Monitor: ESM (and European) “Clarity” Pushed Out - aaa. cds   a


Weekly European Monitor: ESM (and European) “Clarity” Pushed Out - aaa. cds   b



Data Dump:


Eurozone Sentix Investor Confidence -29.6 JUL vs -28.9 JUN

Eurozone Industrial Production -2.8% MAY Y/Y (exp. -3.2%) vs -2.4% APR   [0.6% MAY M/M (exp. 0.0%) vs -1.1% APR]


Germany Exports 3.9% MAY M/M (exp. 0.2%) vs -1.7% APR

Germany Imports 6.3% MAY M/M (exp. 0.8%) vs -4.9% APR

Germany CPI 2.0% JUN Final [unch vs previous estimate]

Germany Wholesale Price Index 1.1% JUN Y/Y vs 1.7% MAY


France Bank of France Business Sentiment 91 JUN vs 92 MAY

France Industrial Production -3.5% MAY Y/Y (exp. -1.6%) vs 0.8% APR   [-1.9% MAY M/M (exp. -1.0%) vs 1.4% APR]

France CPI 2.3% JUN Y/Y vs 2.3% MAY


UK Industrial Production -1.6% MAY Y/Y (exp. -2.1%) vs -2.0% APR

UK Manufacturing Production -1.7% MAY Y/Y (exp. -1.9%) vs -1.5% APR   [1.2% MAY M/M (exp. -0.1%) vs -0.8% APR]


Italy Industrial Production -6.9% MAY Y/Y (exp -8.6%) vs -9.3% APR   [0.8% MAY M/M (exp. -0.6%) vs -2% APR]



Spain House Transactions -11.6% MAY Y/Y vs -9.9% APR


Portugal CPI 2.7% JUN Y/Y vs 2.7% MAY


Switzerland Unemployment Rate 2.9% JUN vs 2.9% MAY

Switzerland Producer and Import Prices -2.2% JUN Y/Y (exp. -2.2%) vs -2.3% MAY


Norway CPI 0.5% JUN Y/Y (exp. 0.8%) vs 0.5% MAY

Denmark CPI 2.2% JUN Y/Y vs 2.1% MAY

Finland CPI 2.8% JUN Y/Y vs 3.1% MAY

Finland Industrial Production -1.7% MAY Y/Y vs -2.8% APR   [1.2% M/M MAY vs 0.6% APR]


Netherlands Retail Sales 1.6% MAY Y/Y vs -8.7% APR

Netherlands Industrial Production -0.5% MAY Y/Y (exp. -0.5%) vs 0.4% APR  [-0.3% MAY M/M (exp. -0.5%) vs -2.5% APR]

Sweden Industrial Production -2.3% MAY Y/Y (exp. -6.9%) vs -6.4% APR  [ 3.5% MAY M/M (exp. 0.4%) vs -0.2% APR]

Sweden CPI 1.0% JUN Y/Y vs 1.0% MAY


Greece Industrial Production -2.9% MAY Y/Y vs -2.2% APR

Greece CPI 1.0% JUN Y/Y (exp. 0.8%) vs 0.9% MAY

Greece Unemployment Rate 22.5% APR vs 21.9% MAR


Ireland 1Q GDP 1.2% Y/Y vs 2.8% in Q4

Ireland CPI 1.9% JUN Y/Y vs 1.9% MAY


Czech Republic CPI 3.5% JUN Y/Y vs 3.2% MAY

Czech Republic Unemployment Rate 8.1% JUN vs 8.2% MAY

Czech Republic Construction Output -3.5% MAY Y/Y vs -2.7% APR

Czech Republic Industrial Output -2.4% MAY Y/Y (exp. -2.3%) vs 2.2% APR


Turkey Industrial Production WDA 5.9% MAY Y/Y vs 4.2% APR


Latvia Unemployment Rate 11.9% JUN vs 12.3% MAY

Slovakia CPI 3.6% JUN Y/Y vs 3.4% MAY

Hungary Industrial Production 1.9% MAY Y/Y vs -3.1% APR



Interest Rate Decisions:


(7/12) Serbia Repo Rate HIKE 25bps to 10.25%

(7/12) Latvia Refinancing Rate CUT 50bps to 3.00%

(7/13) Russia Overnight Deposit Rate UNCH at 4.00%

(7/13) Russia Overnight Auction-Based Repo UNCH at 5.25%

(7/13) Russia Refinancing Rate UNCH at 8.00%



The Week Ahead:


Monday: Jun. Eurozone CPI; May Eurozone Trade Balance; May Italy Trade Balance, General Government Debt


Tuesday: Jul. Eurozone ZEW Survey Economic Sentiment; Jun. Eurozone New Car Registrations; Jul. Germany ZEW Survey Current Situation and Economic Sentiment; Jun. UK CPI, Retail Price Index; May UK ONS House Price; May Spain Trade Balance


Wednesday: May Eurozone Construction Output; UK BoE Minutes; Jun. UK Claimant Count Rate, Jobless Claims Change; May UK Average Weekly Earnings, ILO Unemployment Rate, Employment Change; 2Q Spain House Price Index; Italy Chamber of Deputies Votes to Approve ESM, Fiscal Pact; May Italy Current Account


Thursday: ECB Governing Council Meeting; May Eurozone Current Account; Jun. UK Retail Sales; May Italy Industrial Orders, Industrial Sales


Friday: Jun. Germany Producer Prices; Jun. UK Public Finances, Public Sector Net Borrowing; May UK Current Account



Extended Calendar Call-Outs:


19 July: ECB governing council meeting


18-19 October: Summit of EU Leaders



Matthew Hedrick

Senior Analyst


Industrial Indicator: Truck Backlog to Build and More on Mining

Chart of the Day

  • Backlog to build ratio declines consistent with expectations for production cuts
  • Historically, very low backlog to build ratios have coincided with buying opportunities in shares of OEMs
  • Declining production should keep the Class 8 truck fleet old
  • An older fleet with high utilization (mid-90s in May) is typically associated with outperformance for OEM shares

Industrial Indicator: Truck Backlog to Build and More on Mining - class 8 back to build


The Mining Investment Bubble

Yesterday’s Industrial Indicator on Caterpillar’s exposure to mining investment attracted some interest.  The Resources division is CAT’s most profitable and has the highest margins and returns on assets.  CAT even added Bucyrus to this division, apparently with poor cyclical timing.  This is not to say that Bucyrus is a bad fit inside of CAT, just that it was purchased during a period of (very) abnormally high investment in mining equipment.  The first step of our investment process separates cyclically driven results from secular/sustainable results.  The resources division at CAT, along with other mining exposed equipment producers like Sandvik, Komatsu, JOY, and Terex, could see that source of demand evaporate.  Global mining output could continue to expand with much lower levels of capital spending, so a commodity crash is not required for revenues in these divisions to contract.


Industrial Indicator: Truck Backlog to Build and More on Mining - perf 7132012


HedgeyeRetail Visual: Dollar Store Tailwinds Fading

Over the past 5 years, the Dollar Stores experienced a notable shift in both private label and consumables right when the consumer needed it which drove massive margin expansion. This happened alongside accelerated unit growth and a tailwind from food inflation. Now, private label and consumables penetration are hitting a ceiling and food prices are deflated relative to last year. With margins now at peak, we don’t need profitability to deteriorate but rather for these tailwinds to fade in order to build the short case.   


HedgeyeRetail Visual: Dollar Store Tailwinds Fading - dollar store margins


HedgeyeRetail Visual: Dollar Store Tailwinds Fading - Food Inflation

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The Economic Data calendar for the week of the 16th of July through the 20th 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.




TODAY’S S&P 500 SET-UP – July 13, 2012

As we look at today’s set up for the S&P 500, the range is 25 points or -0.43% downside to 1329 and 1.44% upside to 1354. 











  • ADVANCE/DECLINE LINE: on 07/12 NYSE -792
    • Down versus the prior day’s trading of 75
  • VOLUME: on 07/12 NYSE 763.79
    • Decrease versus prior day’s trading of -55bps
  • VIX:  as of 07/12 was at 18.33
    • Increase versus most recent day’s trading of 2.12%
    • Year-to-date decrease of -21.67%
  • SPX PUT/CALL RATIO: as of 07/12 closed at 1.31
    • Up from the day prior at 1.10 


  • TED SPREAD: as of this morning 36
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.48%
    • Increase from prior day’s trading at 1.47%
  • YIELD CURVE: as of this morning 1.23
    • Down from prior day’s trading at 1.22 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: PPI M/m, June, est. -0.5% (prior -1%)
  • 8:30am: PPI Ex Food/Energy M/m, June, est. 0.2% (prior 0.2%)
  • 9:55am: U. of Michigan Conf., July, est. 73.5 (prior 73.2)
  • 11am: Fed to purchase $1.5b-$2b coupon securities in 2/15/2036 to 5/15/2042 range
  • 1pm: Baker Hughes rig count
  • 1:20pm: Fed’s Lockhart speaks in Jackson, Mississippi 


    • Opening news conf. at Natl Governors Assn. meeting, 10am
    • House meets in pro forma session, Senate schedule TBA
    • N.Y. Fed releases documents on troubles detected with Libor
    • CFTC holds closed meeting on enforcement matters, 10am
    • SEC holds closed meeting on enforcement matters, 1pm
    • Acting Commerce Secretary Rebecca Blank speaks at opening of first U.S. Patent and Trademark Office satellite in Detroit
    • Wikimedia hosts 2012 Wikimania conference on government use of Wiki information networks, 9am
    • National Academy of Sciences holds conference call briefing to discuss report on three options for National Bio-, Agro- Defense Facility in Manhattan, Kansas, 1pm 


  • JPMorgan releases earnings; 2-hr call with analysts 7:30am
  • Wells Fargo releases earnings
  • Google’s Page in much better health, Chairman Schmidt says
  • Lexmark cuts 2Q sales forecast, citing European demand
  • Berkshire Hathaway CEO Warren Buffett on BTV at 8am
  • China’s growth slows to 3-yr. low on trade, demand
  • New York Fed to release documents on Libor
  • P&G board members said to discuss replacing CEO McDonald
  • Bank of Korea trims 2012 growth forecast after cutting rates
  • Italy credit rating cut by Moody’s; contagion, funding risks
  • Italy readies $6.1b bond sale
  • Darden Restaurants to buy Yard House USA for $585m
  • Bernanke testifies, China housing, GOOG: Wk Ahead July 14-21
  • JPMorgan’s ‘London Whale,’ two supervisors leave bank: WSJ 


    • JPMorgan Chase (JPM) 7am, $0.76
    • Webster Financial (WBS) 8am, $0.44
    • Wells Fargo (WFC) 8am, $0.81 


  • Carbon Surge Stokes Suspicion EU Ideas Leaked: Energy Markets
  • U.S. Tightens Iran Noose With Sanctions on Tankers, Front Firms
  • Copper Traders Most Bearish in Six Weeks on Demand: Commodities
  • Asian Corn Demand Seen Gaining as Drought Shrivels U.S. Crop
  • Oil Rises on China Stimulus Optimism, Tightening Iran Sanctions
  • Corn Rallies in Best Weekly Run Since November on U.S. Drought
  • Copper Advances as China Slowdown May Signal Additional Easing
  • India to Review Sugar Exports After Sales Reach 2 Million Tons
  • Gold Advances in New York on Speculation Over Stimulus by China
  • Cocoa Advances After Falling 5.1% on Lower European Processing
  • Malaysia Weather Dept. Sees 58% Chance of El Nino From August
  • Bipartisan Attacks Stymie Bill to Overhaul U.S. Agriculture
  • Malaysian Cocoa Maker Guan Chong Said to Consider Bids for Stake
  • U.K. Seen Doubling Power Price to Guarantee New Reactor: Energy
  • Rubber Gains, Paring Weekly Loss, as Rains Cut Thai Supplies
  • Palm Oil Rebounds as Some Investors Cover Bets on Further Losses
  • India to Sell Wheat From Reserve as Prices Surge on U.S. Drought
























The Hedgeye Macro Team


The Macau Metro Monitor, July 13, 2012




According to advance estimates released by the Ministry of Trade and Industry, Singapore 2Q GDP unexpectedly contracted mainly due to a sequential contraction in the manufacturing sector.  2Q GDP fell 1.1% QoQ on a seasonally adjusted and annualized basis, missing estimates of 0.8% growth.  On a YoY basis, 2Q GDP grew 1.9%, missing consensus of +2.4%.



Visitor arrivals in package tours increased by 11.7% YoY to 669,460 in May 2012.  Visitors from Mainland China (465,923) went up by 4.9%, with 166,292 coming from Guangdong Province; Taiwan (52,839), Hong Kong (33,485), and the Republic of Korea (24,941) increased by 63.2%, 28.0% and 18.5% respectively.


There were 24,117 guest rooms available at the 97 hotels and guest-houses at end-May 2012, an increase of 2,599 rooms (+12.1%) YoY, with those of the 5-star hotels accounting for 61.1% of the total.  The average length of stay decreased by 0.11 night to 1.4 nights.



Filipino billionaire, John Gokongwei Jr., is reportedly in talks to join Kazuo Okada in the development of his Manila Bay Casino project.  According to sources, Gokongwei’s property arm, Robinson Land Corp., has offered to run the gaming and retail operations of Okada’s Tiger Resorts project, worth $2 billion, in Entertainment City, a 100-hectare property on the edge of Manila Bay.  Gokongwei, who owns a shopping mall chain, hotel resorts and the country’s biggest budget airline, Cebu Pacific, would be joined in the project by another Filipino billionaire, Andrew Tan, whose property group would handle the land development side of Okada’s casino project.



MGM China Holdings is seeking a HK$12-billion (US$1.55 billion) refinancing loan.

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