Draghi’s Newest Rescue Plan Revealed in September ECB Presser

Takeaway: the ECB’s sovereign bond buying resumes but it is far from the elixir to cure Europe’s ills in one shot. Growth will remain under pressure.

Positions in Europe: Long German Bonds (BUNL); Short EUR/USD (FXE); Short Greece (GREK)


Central Bankers of the World Unite!


Today ECB President Mario Draghi issued much of what was leaked in recent days – the newly invented Outright Monetary Transactions (OMTs) program. It will buy bonds on the secondary market of Eurozone member states, targeting bonds with maturities of 1-3 years. Draghi stated the program’s goal as: “OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”


Draghi shied away from calling the scope of purchases unlimited, instead he stated that the buying size will be adequate to reach objectives and provide “a full and effective backstop that removes tail risk from the Euro area.” Draghi stated that OMTs buying will be fully sterilized (as to not influence money supply growth); will cover any country to the extent it is warranted (and/or request) with strict conditionality (including the adherence of ongoing fiscal consolidation programs); and that these bonds do not carry a senior creditor status. Of note that is that the Securities Market Program (SMP) will be terminated as of today.


Our skepticism runs high that such market intervention would end favorably for the region or that Draghi can truly remove tail risk from the region, however we expect a significant bounce across European capital markets and the common currency in response to the changing of the goal posts. This is very apparent today, but is it sustainable? Certainly Draghi is out to prove that he can maintain price stability and preserve the common currency – “full stop”.


Concerns with the OMTs:

  • While buying on the shorter end of the curve may suppress yields on short-term maturities, what will prevent the longer end from running away?
  • How will the ECB decide on the size of its purchases?
  • Could this OMTs intervention be complicated by the German Constitutional Court decision on 9/12 regarding the ESM?
  • How does Bundesbank President Jens Weidmann, who was the one voice of dissent in today’s decision, complicate the Eurozone’s united policy voice?
  • How impactful can this program be – similar to the SMP – until the Eurozone has a structured Fiscal Union?


Interest Rates on Hold


Regarding the policy decision, the council decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively, which was in line with our forecast.


Interestingly, growth targets were revised down (versus the staff projection from June) as inflation projections were revised up. Again, this represents our fundamental case that despite all the market intervention, prices will (in time) reflect the underlying health (or lack thereof) in the region.


GDP growth:

-0.6% and -0.2% for 2012 (versus -0.5% and 0.3%)

-0.4% and 1.4% for 2013 (versus 0.0% and 2.0%)


HICP inflation:

 2.4% and 2.6% for 2012 (versus 2.3% and 2.5%)

 1.3% and 2.5% for 2013 (versus 1.0% and 2.2%)


For Draghi’s complete Introductory Statement click here.

For the press release of the Technical features of the OMTs click here.

For the press release of Collateral requirements click here.


Draghi’s Newest Rescue Plan Revealed in September ECB Presser - 2222. eur


Matthew Hedrick

Senior Analyst

SNAP: Food Stamp Participation Decelerates

Takeaway: Dollar stores like $FDO and $DG rely on customers using food stamps to boost revenue. Fewer people on food stamps is a negative for them.

One of the most unique metrics out there is the Supplemental Nutrition Assistance Program (SNAP) participation rate. SNAP is a fancy term for food stamps and the rates had peaked a few months ago with nearly 15% of the country enrolled in SNAP. The latest stats dropped yesterday and participation growth is continuing to decelerate.


One sector that relies on a high SNAP participation rate is dollar stores. Think about it: dollar stores are basically taking in a boatload of federal cash as people on food stamps hit up Dollar General (DG) and Family Dollar (FDO) for their milk, bread, beans and other necessities. It’s been a boon for dollar stores, helping to drive comps, sales and traffic. If the SNAP participation rate continues to decline at an accelerating rate, dollar stores will likely see a decline in the aforementioned metrics unless they can make up for the lost SNAP customers.



SNAP: Food Stamp Participation Decelerates - SNAPrates


Unlimited Possibilities







Central planners around the world are a force like no other. The amount of power they have and how quickly they can use it (intentionally or unintentionally) is astounding. So it should come as no surprise that this morning, Super Mario Draghi came out and basically said “let’s rock!” The plan is that the ECB will begin an “unlimited” bond buying program. Never mind the 8 to 10 handles the S&P 500 futures ripped before the open; slowing growth on a global scale seems to be what everyone is looking for these days. Whatever it takes, right?




With the central planner cartel getting ready to do some serious bond buying and undertake equally bodacious easing measures, the focus has now turned to gold for many investors. Drive down the US dollar, gold goes up and vice versa. Makes sense as we believe growth is slowing and will continue to do so for some time unfortunately. Here’s Keith’s thesis, word for word, on why he’s short gold even with this morning’s massive rip to the upside:


“I’m short Gold here. On balance, until turning bearish on Gold in Q1 of 2012, I have been a Gold bull since 2003. I have #timestamped 35 long/short positions in the GLD since founding the firm in 2008 (been right 30x). 


The more wrong I am on Gold (from here), the more right I’ll be on #GrowthSlowing.”




You’ve probably heard this one before but we’ll continue to repeat it with no end in sight. It’s simple. You need to manage the risk and the range for any trade. If you are trading the S&P 500 and you know resistance is t 1407 and support is at 1398, well then you’re going to trade within that range and any deviation outside that range will make for a big move. Risk is simple. Too much is a bad thing, too little not a good thing. Get it together and figure out a risk level you’re comfortable with.






Cash:                  UP


U.S. Equities:   DOWN


Int'l Equities:   DOWN   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“How one economist created the most realistic fantasy football league ever” -@TheAtlantic




“Conscience is the inner voice that warns us somebody may be looking.” –H.L. Mencken




Samsung’s Galaxy S III smartphone usurped Apple’s iPhone 4S as the top selling smartphone in the US for the month of August. That is expected to be short-lived with Apple announcing its next-gen iPhone on September 12.

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Takeaway: Maybe less so over the near-term, but the performance of the China stock market impacts Macau gaming revenues.

Our statistical analysis has found that Mass gaming revenues and VIP volumes lag the Shanghai Stock Index (SSE) by 4 and 3 months, respectively.  That is, the YoY change in Chinese stocks is a statistically significant driver of the YoY change in Macau gaming revenues (GGR), albeit on a lag.  The upshot here is that while we still believe we are above consensus expectations for the rest of the year, based on the recent performance of the SSE, there could be 1-3% downside to our monthly YoY GGR projections. 




We’ve seen and authored studies in the past that showed no correlation between the Shanghai Composite and Macau gaming revenues (GGR).  An astute client of ours recently suggested that Macau could follow the same pattern as a number of US-based industrial companies that saw their China business lag the Chinese stock market.  The theory is that the SSE is a discounting mechanism that leads China's economy up or down which in turn contributes to or detracts from gaming revenues in Macau.


The good news is that July was such a poor month and the stocks have already taken a beating.  Moreover, when we plug the SSE impact into our model, it only reduces YoY growth by 1-3% depending on the month, as can be seen in the chart below.  However, we would be concerned if the SSE continues to fall.  Our near-term outlook (Trade) for Macau stocks is favorable, particularly LVS, but if the SSE falls further, that would bring some uncertainty into the intermediate or Trend call.  Our long term (Tail) view remains positive.



LULU: Math Matters

Takeaway: It’s critical to delineate between the brand, company and stock for a name like $LULU, which has great returns, but eroding oper metrics.

Conclusion: Let’s remove the emotion and look at the raw math behind one of the most perennially loved names in retail. It’s critical to draw delineation between the Brand, the company and the stock. We'd avoid it.



It’s so easy to like LULU.

But we have to draw a massive delineation between…a) Lululemon the Brand, b) Lululemon Athletica the company, and c) LULU the stock. The first one is great. The second is good. And the third is below-average at best.


The Long term/TAIL, growth is there for this company if it properly allocates capital into fulfilling the Brand opportunity. This is a mere $1.2bn brand (closer to $600-700mm wholesale equivalent in comparing to the NKEs and UAs of the world), and there’s no reason why it can’t get to $3-$4bn over 5-years if it continues to execute. The key here is that if you look at share of the Yoga market, and what those revenue numbers suggest, it implies that LULU will own over 100% of the Yoga space. Clearly that’s not possible. But when you look at great brands in the past, they have continually proved investors wrong by creating new spaces and filling them with product ideas that most folks like you and I cannot even foresee. LULU is one of those companies.


BUT…And it’s a big ‘but’. When we remove all the emotion around the cult stock status it’s been awarded and simply look at the math, we can’t get our hands around the eroding productivity of existing assets.


By all means, we give LULU the credit it deserves for 100%+ returns on capital. But this is by way of churning out 7x+ asset turns on 25%+ EBIT margins. Maybe one of these factors is sustainable. But if LULU sustains both – as it is priced to do – then it will be the first company in recent memory to do so, aside from Apple. Sustaining both would suggest that there is something so special about it that it is massively undervalued even at current levels. So the simple question is really – “Is LULU = AAPL?” As great as it is, we’d give that one a definitive ‘No’.


While we’re believers in the concept and the brand, we can’t make the leap to assume that it can prevent a continued rollover in new store productivity. And in fact, we’re surprised that more attention has not been paid to the issue.

Here’s some geeky math on our thought process around the different between reported comps and the change in total sales/square foot. …


Let’s assume that…

1) total store sales yy chg = (chg in comp store sales growth/square foot + new store sales/square foot) + (yy chg in comp store size + chg in new store size).

2) Therefore yty % chg comp sales = (chg in all stores revenue/sq' - chg in new stores revenue/sq') + (change in all stores size - change in new stores size). Of course, the figures within the parens must be weighted by the number of stores.

3) If store size is basically unchanged then comp growth and the YTY % chg in sales/sq' in comparable stores should be the same.  in other words, comp growth = revenue/sq' growth in comp stores, when store size is unchanged.

4) therefore the difference between reported comp growth in each quarter and the YTY chg in all store sales/sq' in the same quarter will be the YTY % change in sales/sq' at new stores.  Again, in mathematical formula form:

comp stores sales growth - yty chg in all stores revenue/sq' = yty change in new stores revenue/sq' (again weighted by the number of new and comp stores)

5) But backing this number out, yields increasingly negative growth rates in new store revenue/sq', so what are we missing?

Using 1Q12 as an example:

comp growth (GAAP): 24%

YTY chg average sales/sq in all stores: 11%

YTY % chg in average store size: 1%

Residual: 12%

number of non comp stores: 42
number of total stores at qtr end: 180


  11%=(138/180) x 24% + (yty chg in new store revenue/sq' x (42/180))

11%= 18.4% + (.223 x yty chg in new store revenue/sq')
(11%-18.4%)/.223 = yty chg in new store sales/sq'
-31.7% = yty chg in new store sales/sq'


In looking at these numbers on the heels of implied new store productivity going from 175% in 2010, to 95%in 2011, and then down another 30% in 1Q12, we think that we’re going to need to see a massive ramp in comp in order to offset this trend.


Maybe what we’re missing is the impact of, and the quirky accounting therein. Regardless, we’re going to point back to the simple ROIC calculation. Can the business grow faster than productivity at existing stores will erode? We’re not so sure. If that’s the case, then either asset turns or margins are coming down. That means that ROIC comes down. That means that a 30x+ p/e multiple matters again.


Will all of this come out with tomorrow’s print? Maybe. Maybe not. But we definitely would not touch the stock in advance of the quarter.The downside if this trend perpetuates is far worse than the upside would be if it reverses.


If I gave Keith the fundamental OK, he’d likely short this stock in a heartbeat.


TODAY’S S&P 500 SET-UP – September 6, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -0.39% downside to 1398 and 0.75% upside to 1414. 











  • ADVANCE/DECLINE LINE: on 09/05 NYSE -148
    • Decrease versus the prior day’s trading of 541
  • VOLUME: on 09/05 NYSE 675.64
    • Increase versus prior day’s trading of 5.70%
  • VIX:  as of 09/05 was at 17.74
    • Decrease versus most recent day’s trading of -1.33%
    • Year-to-date decrease of -24.19%
  • SPX PUT/CALL RATIO: as of 09/05 closed at 2.15
    • Up  from the day prior at 1.17


  • TED SPREAD: as of this morning 30.84
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.62%
    • Increase from prior day’s trading of 1.60%
  • YIELD CURVE: as of this morning 1.38
    • Up from prior day’s trading at 1.36

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: Bank of England monetary policy committee decision
  • 7:30am: Challenger Job Cuts Y/y, Aug. (prior -44.5%)
  • 7:45am: ECB ann. interest rates; governing council meets
  • 8am: RBC Consumer Outlook Index, Sept. (prior 46.4)
  • 8:15am: ADP Employment Change, Aug., est. 140K (prior 163k)
  • 8:30am: Init. Jobless Claims, 9/1, est. 370k (prior 374k)
  • 9am: U.S. announces plans for sale of 3-year notes, 10-year notes, 30-year bonds
  • 9:45am: Bloomberg Consumer Comfort, Sept. 2 (prior -47.3)
  • 10am: ISM Non-Manuf. Composite, Aug. est. 52.5 (prior 52.6)
  • 10am: Freddie Mac mortgage rate survey
  • 10:30am: EIA natural gas storage
  • 11am: DoE weekly inventories
  • 11am: Fed to purchase $1.5b-$2.0b notes due 2/15/2036-8/15/2042
  • ICSC Chain Store Sales Y/y, Aug. (prior 1.9%)


    • Democratic National Convention in Charlotte, N.C.; Obama will formally accept his party’s nomination for president, outline his goals for nation
    • Bill Clinton nominated Obama for re-election at DNC
    • Fed releases financial disclosure forms of Chairman Ben Bernanke, other board members, 10am
    • House, Senate not in session
    • Negotiators for U.S., eight other Pacific-rim nations will tackle protections for intellectual property, such as pharmaceuticals, in talks in Leesburg, Va., through Sept. 15


  • Draghi credibility at stake as mkts look to ECB to save euro
  • Supervalu to close 60 stores, take pretax charge
  • Growth in U.S. service industries probably eased in August
  • Clinton nominates Obama for re-election at Democratic Convention
  • AIG selling about $2b of AIA Group shares, terms show
  • Australia jobless rate unexpectedly falls, boosts currency
  • Spain sells EU3.5b of debt, meeting maximum target
  • Qantas allies with Emirates on Europe flights, ditching BA
  • Apple rivals try to outshine next IPhone with cool features
  • Amazon readies Kindle Fire update to keep up with Apple, Google
  • Apple urged by China dissident to act against one-child rule
  • Goldman Sachs sued by BayernLB over losses on mortgage bonds
  • Health Net ties to veteran-owned firm probed by agency watchdog
  • Apple TV no IPhone as talks bog down with media companies
  • Bloomberg Canada-Asia Dialog includes talk by Canada PM Stephen Harper


    • Navistar International (NAV) 6am, $(1.41) - Preview
    • Descartes (DSG CN) 6am, $0.14
    • Transcontinental (TCL/A CN) 7am, C$0.42
    • UTI Worldwide (UTIW) 8am, $0.23
    • Hovnanian (HOV) 9am, $(0.14) - Preview
    • North West Co (NWC CN) 10:01am, C$0.36
    • Quiksilver (ZQK) 4pm, $0.06
    • Ulta Salon Cosmetics & Fragrance (ULTA) 4:01pm, $0.51
    • Mattress Firm Holding (MFRM) 4:01pm, $0.28
    • Cooper Cos (COO) 4:01pm, $1.29
    • Infoblox (BLOX) 4:14pm, $0.01



GOLD – the more wrong I am immediate-term on short gold is the more right I’ll be on #GrowthSlowing – one perpetuates the other; Oil back up to $114 this morning as Gold gets pinned at a lower-high vs Feb with a singing -0.91 immediate-term correlation to Down Dollar, Up Euro.


COPPER – all the while, the Doctor doesn’t seem to care much for the gong show either (down this morning, failing at long-term TAIL risk support of $3.85lb, well off its $3.95 high made in Feb).

  • Hurricane Leslie Strengthens En Route to Bermuda, Canada
  • Platinum Buying Expands as Mining Strikes Escalate: Commodities
  • Gold Gains to Highest Since March as Euro Rallies on ECB Plan
  • UN Sees No Reason for Food Crisis as Prices Stabilize in August
  • Oil Rises a Second Day on U.S. Supply Drop, ECB Plan Optimism
  • Soybeans Drop to One-Week Low as U.S. Harvest May Top Forecast
  • Copper Trades at $7,686 a Ton as ECB Leaves Rates Unchanged
  • Goldman Sachs’s Currie Says Commodities May Jump Another 10%
  • Cocoa Reaches 11-Month High Even as Rains Improve; Coffee Falls
  • Rubber Advances as European Central Bank May Act to Tame Crisis
  • Jefferies Aims for Top Five Ranking on the London Metal Exchange
  • Cars Beating Plastics Makes Asia Gasoline Winner: Energy Markets
  • Asia Naphtha Profits Fall; Fuel-Oil Losses Narrow: Oil Products
  • Platinum Buying Expands Amid Mining Strikes
  • Goldman Sachs’s Currie Says Commodities May Advance Another 10%
  • Palm-Oil Veteran Mistry Says Indonesia Has ‘Hidden’ Reserves
  • Palm Oil Drops to Lowest Level in Three Weeks on Higher Supplies














ASIA – Asian equity markets don’t seem to care much for this Western central planning gong show anymore; the higher expectations for money printed from the heavens get, the lower real inflation adjusted growth expectations go – pretty simple; Japan was flat, HK +0.34%, and Singapore was -0.3%; doing nothing, treading on 6wk lows.










The Hedgeye Macro Team

Early Look

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