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Crumble Cake Europe

This note was originally published at 8am on July 13, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I get no respect. The way my luck is running, if I was a politician I would be honest.”

-Rodney Dangerfield

 

I’ve been handed the Early Look pen this morning and thought starting with Dangerfield’s humor was in order.  After all, I cover Europe for the macro team and there’s nothing funny about what’s going on in the region.  Frankly stated, we don’t see a “bazooka” in Europe over the intermediate term as Eurocrats remain politically divided and in a slow and reactive mode to address sovereign and banking imbalances, slapping band-aids on peripheral woes at every corner, but failing to craft a real “path” forward.

 

Unfortunately, now the stakes are much higher as Italy is Too Big to Bail.  For reference, Italy’s total sovereign debt alone is €1.9 Trillion with €372 Billion in debt coming due in the next 12 months versus the combined EFSF and ESM bailout facilities worth around €700-800 Billion. To boot, markets continued to shake this week on statements from Italian PM and technocrat-in-Chief Mario Monti that Italy may want to tap the Eurozone bailout mechanism to help lower its borrowing costs (the 10YR is currently at 5.99%); that he has no plans to seek another term when elections are called next spring; and on Moody’s downgrade of the Italian sovereign yesterday to Baa2 from A3.  And if the political state wasn’t fractured enough, rumors also flew of a Berlusconi comeback. Can you say Bunga Bunga increased risk premium Party!

 

Interestingly enough, much hangs on the Eurozone’s ability to craft a fiscal union (compact) alongside its monetary union. It is firmer ground on this step that we think is critical before real action can be delivered on such proposed plans as:  a banking authority; pan-European deposit insurance; European Redemption Fund; European Financial Transaction Tax; and Eurobonds.

 

That said, we see the passage of a fiscal compact many months to years out, if ever, as countries will be slow to give up their sovereignty to Brussels/Frankfurt. Further, we’d expect the aforementioned facilities to receive approval after much foot-dragging and politicking as the ECB is likely to be wary of extending its balance sheet as a backstop for the programs while strong fiscal nations like Germany will likely balk at signing off on lower creditworthiness in exchange for the region’s risk (Eurobonds).

 

However, as these programs stew, the most pressing issue right now is that the European Stability Mechanism (ESM), originally targeted to be operational by July 1 with firepower of €600 Billion, is in limbo given that Germany’s Constitutional Court passed on making a decision on it this week; already German Finance Minister Wolfgang Schaeuble warned that a ruling (in conjunction with the fiscal compact) could be pushed to this Fall!

 

We mention this indecision on the ESM and fiscal compact from the Germans for a number of reasons:

  1. A lack of decision on Germany’s commitment will broadly breed further indecision across capital markets until the court makes a decision.
  2. Spain’s €100 Billion bailout is dependent on the loans from the EFSF and ESM, and further clarity on the firepower of both facilities is essential because A.) they were not originally crafted with a specific mandate for bank bailouts; and B.) lending first through the sovereign (at least as they were originally intended), before sovereigns can then loan to banks, will simply pile on more sovereign debt and perpetuate the cycle of more sovereign and banking imbalances across the weaker states.
  3. We believe Germany is still carrying the biggest policy stick in Europe (despite a stronger “socialist” French-Italian handshake developing) and how Merkel and her courts rule will have great impact on how Germany may or may not choose to underpin a future fiscal union.

 

In the Balance

 

If the political landscape and potential direction of the Eurozone sounds convoluted, it is! We return to our fundamental  view that neither bailouts nor encouraging more borrowing through cheaper money is the solution to Europe's problem of over-indebtedness. That said, we fully realize that when assessing Europe one must recognize that what Eurocrats “should” do (from an economic policy perspective) may be very different from what they “will” do.   

 

Given the runway on a ruling from the German Court and the fact that there are no planned Summits (i.e. catalysts) around which markets could rally over the intermediate term, we expect Crumble Cake Europe to continue to trade on headline risk, and the EUR/USD cross to remain a relative loser until more decisive action is taken from Eurocrats. As we show in the chart below, the 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. 

 

Should Europe play out as we expect – continued slower growth beyond consensus and Eurocrats socializing weaker members and changing the goalposts along the way– we fear that the next two years across the Eurozone could look a lot like the last two years – short of a default from Italy or more expedient action on such measures as Eurobonds.

 

I suppose I misspoke at the beginning of this missive when I said there was nothing humorous in Europe. Yesterday, Italy's national statistics office threatened to stop issuing data on the economy, saying that it has been crippled by government spending cuts aimed at reducing national debt.

 

Whether or not Italy has an agency to report its economic data reminds me of the old philosophical question: “If a tree falls in a forest and no one is around to hear it, does it make a sound?”  Unfortunately for the Eurozone, the whole is only as strong as its weakest parts and everyone is forced to listen!

 

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1559-1589, $96.76-103.01, $82.81-84.06, $1.20-1.23, and 1329-1354, respectively.

 

Have a great weekend!

 

Matthew Hedrick

Senior Analyst

 

Crumble Cake Europe - el   EUR

 

Crumble Cake Europe - vp 7 13



Battling Ideology

“His own men wanted more of the same, the enemy less.”

-Victor Davis Hanson

 

I am grinding through two books about leadership and war right now – and that probably puts me in a mood to fight. When it comes to going to battle with Fed and ECB ideologies that are perpetuating global #GrowthSlowing, someone has to do it.

 

In his epic classic “The Soul of Battle”, Victor Davis Hanson tells the story of the great Greek General of Thebes, Epaminondas, and his fight for democracy versus the Spartans. “Thebes now battled for neither money nor power, but for the idea of allowing all Greek states to be autonomous.” (page 87)

 

Theban farmers taking up arms for their economic freedom was ultimately instigated by the central planning Spartans themselves. “The Spartan takeover of the sacred Theban Cadmen (382BC) – the city’s spiritual and political center – was the most foolhardy foreign enterprise in the entire history of Spartan foreign policy.” (page 28)

 

It’s different now, but it’s the same.

 

Our Keynesian overlords are taking over the most pure temple of free market capitalism that remains – our public markets. And while I may get my short-term market calls right and wrong, I will not confuse that risk management duration with my principles. After listening to Draghi’s drivel yesterday, I will not provide him the cowardice of standing idle.

 

I am here on the front lines of this ideological debate. And I too will do whatever it takes.

 

Back to the Global Macro Grind

 

Undoubtedly, the toughest balance beam to traverse in my head is my absolute disgust for what I hear these people say every day and what it is I need to do in order to not violate Rule #1 (don’t lose money).

 

We need to keep getting our economic forecasts and risk managed positions right in order to crack these Keynesians right up the middle of their phalanx. Ideologies die on the vine of mediocrity and broken promises.

 

Whether they are coming at us from the ECB or Fed flanks, their ultimate impact can be measured. As you can see in Darius Dale’s Chart of the Day, this is their 2nd major centrally planned attack since June:

  1. Dollar Down
  2. Gold Up
  3. Stocks Up

If you’re going to step on the field with me and my boys, you better realize that winning a few battles doesn’t win you the war. Yesterday, the S&P Futures rallied 27 handles (2 full percentage points) at the stroke of Draghi’s “whatever” shot hitting the tape. Spanish and Italian stocks moved 6-7 full percentage points in less than 3 hours of trading.

 

That’s normal, right? Bull market.

 

If I have reminded you of this 100x in the last 5 years, it’s been 1000x. Get the US Dollar right, and you’ll get a lot of other things right. With the US Dollar Index down a full percentage point on the day yesterday, the #BailoutBulls of the 112th Correlation ran wild.

 

Here’s how our most immediate-term TRADE correlation scored on yesterday’s close (correlation to the USD):

  1. EuroStoxx 600 Index = -0.82
  2. SP500 Index = -0.75
  3. SPX Volatility Index (VIX) = +0.77

In other words, more central planning fire in your Purchasing Power hole continues to do the 2 very things we stand against for The People (24.6% unemployment in Spain this morning) who don’t get paid by food/energy/stock market inflations:

  1. Shortening Economic Cycles
  2. Amplifying Market Volatility

They know it. You know it. The People watching this market know it. No matter which side of this battle of ideologies you stand on, the short-term correlation (price action) is being drive by causality (short-term policy reactions).

 

Their world is built on broken promises. Their bailout policies are designed to inflate asset prices by debauching your hard earned dollars. And now these said leaders of Western Academia’s tallest ivory towers have shot arrows towards the heart of “whatever” they think will have us stand down. Ironically, this is precisely what will make us rise up.

 

Our men and women want more of the same, the enemy less – and that’s the free-market’s trust.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $101.91-107.86, $82.52-83.39, $1.20-1.23, 5, and 1, respectively.

 

Enjoy your weekend and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Battling Ideology - Chart of the Day

 

Battling Ideology - Virtual Portfolio


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 27, 2012


As we look at today’s set up for the S&P 500, the range is 17 points or -0.81% downside to 1349 and 0.44% upside to 1366. 

                                            

SECTOR AND GLOBAL PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: on 07/26 NYSE 1406
    • Up versus the prior day’s trading of 226
  • VOLUME: on 07/26 NYSE 897.88
    • Increase versus prior day’s trading of 14.60%
  • VIX:  as of 07/26 was at 17.53
    • Decrease versus most recent day’s trading of -9.36%
    • Year-to-date decrease of -25.09%
  • SPX PUT/CALL RATIO: as of 07/26 closed at 1.62
    • Up from the day prior at 1.23 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: as of this morning 35
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.46%
    • Increase from prior day’s trading at 1.44%
  • YIELD CURVE: as of this morning 1.23
    • Up from prior day’s trading at 1.21 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: GDP (Q/q), 2Q A, est. 1.4% (prior 1.9%)
  • 8:30am: Personal Consumption, 2Q A, est. 1.3% (prior 2.5%)
  • 8:30am: GDP Price Index, 2Q A, est. 1.5% (prior 2%)
  • 8:30am: Core PCE (Q/q), 2Q A, est. 1.8% (prior 2.3%)
  • 9:55am: U. Michigan Confidence, July final, est. 72.0 (prior 72)
  • 11am: Fed to sell $7.0b-$8.0b notes due 5/15/15-9/30/15
  • 1pm: Baker Hughes rig count 

GOVERNMENT:

    • House Minority Leader Nancy Pelosi speaks to intl AIDS conference at 3:35pm; former President Bill Clinton at 4:25pm
    • Commerce Department announces preliminary anti-dumping duties on Chinese and Vietnamese-made wind towers 

WHAT TO WATCH: 

  • U.S. GDP probably rose at 1.4% annual rate in 2Q, slowest pace in a year
  • Samsung increases lead over Apple in global smartphone mkt
  • Facebook shrs fall amid concerns about pace of growth
  • Universal in talks to sell most of Parlophone to BMG
  • Whole Foods Market reviewing health claims about DHA
  • Cnooc hires U.S. lobbyists to avoid Unocal-style problems with Nexen acquisition
  • Federal Reserve Bank of NY urged federal judge to dismiss Starr International’s lawsuit over govt. bailout of AIG
  • Ecuadorian judge ruled Chevron must pay $19b in environmental damages from ops in the country, higher than $18.2b original ruling: DJ
  • Amarin won FDA approval for first drug, Vascepa, to combat high levels of blood fat that lead to stroke, heart attack
  • Booz Allen Hamilton said to have cut size, rate on term loan B it’s seeking to pay dividend
  • Prologis may sell ~$800m of U.S. properties by end of 2012, co-CEO Hamid Moghadam told Bloomberg News
  • Spanish unemployment rises to highest in democratic history
  • Italy borrowing costs fall at 6-month bill auction
  • U.S. Congress probably will delay action on legislation to ease trade relations with Russia until after country joins WTO next month
  • Burberry to buy out license rights of Inter Parfums for $220m
  • Fed, ECB Meet; U.S. Jobs; Olympics: Week Ahead

 EARNINGS:

    • Calpine (CPN) 6am, $0.01
    • Colfax (CFX) 6am, $0.36
    • Helmerich & Payne (HP) 6am, $1.15
    • TMX Group (X CN) 6am, C$0.73
    • LyondellBasell (LYB) 6am, $1.40
    • Prosperity Bancshares (PB) 6:02am, $0.77
    • Magellan Health Services (MGLN) 6:30am, $0.91
    • WABCO Holdings (WBC) 6:30am, $1.17
    • Coventry Health Care (CVH) 6:30am, $0.64
    • Newell Rubbermaid (NWL) 6:30am, $0.45; Preview
    • Barnes Group (B) 6:30am, $0.48
    • Aon (AON) 6:30am, $1.02
    • DTE Energy Co (DTE) 7am, $0.70
    • LifePoint Hospitals (LPNT) 7am, $0.81
    • Merck (MRK) 7am, $1.01; Preview
    • Eldorado Gold (ELD CN) 7am, $0.12
    • DR Horton (DHI) 7am, $0.19; Preview
    • Pilgrim’s Pride (PPC) 7am, $0.23
    • Legg Mason (LM) 7am, $0.03
    • OneBeacon Insurance Group Ltd (OB) 7am, $0.26
    •  Alliance Resource Partners (ARLP) 7am, $1.64
    • Alliance Holdings GP (AHGP) 7am, $0.84
    • NV Energy (NVE) 7am, $0.18
    • Celestica (CLS CN) 7am, $0.24
    • HMS Holdings (HMSY) 7:30am, $0.21
    • First Niagara Financial Group (FNFG) 7:30am, $0.18
    • American Axle (AXL) 7:30am, $0.50
    • TransForce (TFI CN) 7:30am, C$0.37
    • Arch Coal (ACI) 7:45am, $(0.18)
    • Cameco (CCO CN) 8am, $0.21
    • KKR (KKR) 8am, $0.16
    • Moog (MOG/A) 8am, $0.85
    • Atco Ltd/Canada (ACO/X CN) 8:07am, C$1.36
    • Canadian Utilities Ltd (CU CN) 8:16am, C$0.86
    • Chevron (CVX) 8:30am, $3.23
    • TransCanada (TRP CN) 8:45am, C$0.48
    • NuStar Energy (NS) 8:45am, $0.25
    • NuStar GP Holdings LLC (NSH) 8:45am, $0.35
    • Forum Energy Technologies (FET) Pre-Mkt, $0.47
    • Highwoods Properties (HIW) Post-Mkt, $0.69 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES

 

USD will Bernanke drive home the 1-2 #BailoutBull punch next week? I don’t know; neither does the Dollar or Gold, yet – need more times/prices; both are trading right at the lines where we could go either way. We'll let the market tell me what to do on this as usual.

 

THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS

 

SPAIN – reports another record unemployment rate (24.6%), so it looks like Draghi is going to need one heck of a whatever to get that colossal failure of Keynesian sense under control; Spanish stocks lead losers this morning, down -1.7% (down -30% since March), bearish on all 3 of our risk mgt durations.


THE HEDGEYE DAILY OUTLOOK - 6

 


ASIAN MARKETS

 

CHINA – Chinese and Singaporean stocks couldn’t care less about Draghi’s drivel; if not going up on the “news” tells you anything, it’s a reminder that Qe and anything that looks like it jacks up what is perpetuating #GrowthSlowing to begin with, rising food/oil prices.

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team


THE M3: UNEMPLOYMENT RATE

The Macau Metro Monitor, July 27, 2012

 

 

EMPLOYMENT SURVEY FOR APRIL-JUNE 2012 DSEC

There were more people looking for work during the Summer Holiday; consequently, the unemployment rate for April-June 2012 increased slightly to 2.1%, up by 0.1% point respectively from the previous period (March-May 2012).  Total labour force was 346,000 in April-June 2012 and the labour force participation rate stood at 71.9%.  Total employment was 339,000, an increase of 1,300 over the previous period.

 


SBUX: STILL NOT BEARISH ENOUGH

We changed our fundamental stance on Starbucks on June 12th.  The reason for this change was a combination of the Hedgeye Macro Team’s call on Global Growth Slowing, the La Boulange acquisition, and our conviction that managing five concepts at once was likely to lead to inefficiency.

 

Starbucks reported worse-than-expected 3QFY12 earnings after the close.  There were not many positives to salvage from the call other than comps do not look too bad.  Given the unmistakable slowing in trends, however, this is scant consolation.  The macroeconomic environment is playing a role, certainly, but company specific issues are also a factor.   

 

We will advise our clients to remain on the sidelines until consensus expectations come closer in line with reality.  The Starbucks business model is sensitive to economic volatility.  Additionally, to become bullish on Starbucks again, we would need to see management focus on fewer concepts.  Within its core business, CPG, and its Verissimo home brewer, the company can easily satisfy investor appetite for growth.  Increasing the number of “four-wall” concepts under its umbrella is, in our view, not the correct move at this stage.  Below is a summary of the quarter with some of our takeaways.

 

Guidance:

  • 4QFY12 revenue growth of 10-12%
  • 4QFY12 EPS of $0.44-0.45, growth of 19-22% versus consensus of $0.48
  • FY13 targeted revenue growth of 10-13%
  • 1,200 net new stores – acceleration in U.S., China, possible acceleration of closures in Europe
  • FY13 EPS of $2.04-$2.14 versus consensus of $2.29, according to Consensus Metrix
  • FY12 impact of commodity costs remains $230mm
  • FY13 is locked for coffee costs through 11 months at favorable prices. ~100m tailwind to operating income
  • FY13 new unit growth of 1,000 stores
    • Americas +500
    • CAP +400
    • EMEA +100

3QFY12 Consolidated

  • 3QFY12 EPS of $0.43 versus $0.45 consensus represented 19% y/y growth
  • Sales increased 13% to $3.3 billion on 6% Global Consolidated comps

HEDGEYE: Consensus was disappointed by 3QFY12 and still needs to lower expectations for FY12 and FY13 to avoid further disappointment.  SBUX is one of the most loved names in the industry; sell-side sentiment has a long way to go.  Margins should pick up going forward as commodity cost pressure on the P&L eases.

 

SBUX: STILL NOT BEARISH ENOUGH - sbux cons pod1

 

SBUX: STILL NOT BEARISH ENOUGH - SBUX pod 2

 

 

Americas:

  • Comps gained 7% during 3QFY12
  • Slowing trends in June was primary driver behind EPS miss
  • Evolution Fresh drinks in 800+ stores in Seattle, LA, San Diego. Plans to 2x in coming months
  • SBUX operates one of the largest mobile payment programs globally. ~1m U.S. payments/week

SBUX: STILL NOT BEARISH ENOUGH - sbux americas pod1

 

EMEA

  • Mgmt “seeing tangible benefits” of ongoing initiatives in the region but “long road” back
  • Seeking to “optimize” portfolio, possibility of increased closures and possible charges

HEDGEYE:  The comps and margins in Europe, obviously, imply a dire situation in that geography for Starbucks.  Despite management’s apparent determination to turn things around there, we feel it is largely out of the company’s hands.  Obviously continuing to operate competitively is crucial, but we believe it could possibly be a sustained period of time before Europe is a meaningful profit-driver again.

 

SBUX: STILL NOT BEARISH ENOUGH - sbux emea pod1

 

 

CAP

  • On track for 1500 stores on mainland China by 2015
  • China representing 1/2 of 400 (up from 300) projected FY12 CAP openings
  • Management believe the brand has “turned the corner” in terms of growth in China
  • Contribution to company profitability 13% YTD versus 9% two years ago

HEDGEYE: This remains a high-margin, high-growth region for Starbucks that seems to be generating a lot of excitement.  Two-year average trends sequentially accelerated in 3QFY12.    

 

SBUX: STILL NOT BEARISH ENOUGH - sbux cap pod1

 

 

CPG & Other

  • CPG segment reached $1 billion for first time
  • Premium coffee now 50% of total U.S. grocery aisle coffee sales
  • Starbucks brands leading with 28.2% share
  • Advance commitments for Verissimo from retailers bode well for holiday season
  • 15% share of premium single-cup market with more than 230 million cups shipped in 5 months

 

SBUX: STILL NOT BEARISH ENOUGH - sbux earnings recap

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst 

 


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