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A Eurozone Crisis Of Confidence

Takeaway: With confidence heading lower for the sixth consecutive month, not even Draghi's "unlimited" buying power is enough to boost EU morale.

As fall kicks into high gear, tensions in the Eurozone have grown thick as both economic sentiment and consumer confidence continue to slide lower for the sixth consecutive month of declines.

 

Everything seems to continue to go wrong in the EU with eurocrats fighting over lending and bailout terms with manufacturing and services confidence wearing thin as well. It backs up our case for shorting the Euro which we’ve done via the FXE ETF in our Real-Time Positions. 

 

 

A Eurozone Crisis Of Confidence  - aa. 1

 

 

A Eurozone Crisis Of Confidence  - aa. 3

 

 

The uncertainty revolving around a monetary, fiscal and banking union as Germany pushes back over terms of said unions. It appears Draghi’s “unlimited” buying comments from earlier in the month are doing little to restore order to things.

 

Senior Analyst Matthew Hedrick breaks down the long-term implications for the Eurozone crisis:

 

"Here we’ll note that the data from the Eurozone continues to paint a challenged fundamental picture over the intermediate to longer term. These confidence figures are but one piece of the puzzle demonstrating the intersection between expectations for slowing growth and the uncertainty on the direction of the Eurozone.  Eurocrats continue to suspend reality and Draghi’s “unlimited” put will continue to fuel a disconnect between the health of the economy and performance of capital markets."


Eurozone Confidence Continues to Roll

Takeaway: Confidence falls on the intersection between growth slowing and Eurocrat policy uncertainty. Waiting on the OMTs.

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

 

The charts below show very definitively that confidence figures across the Eurozone continue to roll. Business, Consumer, Economic, Industrial and Services confidence figures all fell in the September reading, marking 6 to 7 months of consecutive decline. 

 

Eurozone Confidence Continues to Roll - aa. 1

 

Eurozone Confidence Continues to Roll - aa. 2

 

Eurozone Confidence Continues to Roll - aa. 3

 

Here we’ll note that the data from the Eurozone continues to paint a challenged fundamental picture over the intermediate to longer term. These confidence figures are but one piece of the puzzle demonstrating the intersection between expectations for slowing growth and the uncertainty on the direction of the Eurozone.  Eurocrats continue to suspend reality and Draghi’s “unlimited” put will continue to fuel a disconnect between the health of the economy and performance of capital markets.

 

As we see it, there is a long and uncertain road for the Eurozone moving from a monetary union to a monetary union with a fiscal union, including a banking union. We’ve already seen much push back from Germany on terms of a banking union, and expect push back if and when countries are required to give up their fiscal sovereignty to Brussels.

 

In the wake of Draghi’s unlimited announcement (9/6), this week has shown an increase in Eurozone sovereign yields (and CDS spreads). We expect that the markets and the EUR/USD cross could get a lift (but likely just a short-term one) from the inevitable announcement of the ECB to engage the OMTs program to buy sovereign bonds from such countries as Spain and Italy. However, market movement will largely depend on the severity of the conditions demanded in return for the buying.  Yet our hunch is that the ECB will have loose and/or forgiving terms in any case, which would likely set us up to fade any Eurozone equity market and EUR/USD strength.

 

Matthew Hedrick

Senior Analyst


NKE: A Rare Glimpse...

Takeaway: Here’s a very rare look under the hood of Nike's footwear product by platform. By platform we mean Jordan, Shox, Free, Lunar, Air, etc.…

Here’s a very rare look under the hood of Nike's footwear product by platform. By platform we mean Jordan, Shox, Free, Lunar, Air, etc.… The results here look rather simple but it's the result of very detailed and exhaustive analysis of point-of-sale data that we procure from third-party vendors. Aside from the sheer diversity of the product, the most notable callout is that unlike other brands Nike doesn't simply come out with a new platform that simply fizzles out after initial launch. A new Nike platform, in effect, equates to a new business within the company which usually grows over time. Here are a few other takeaways.

 

  • Free and Dual Fusion are the fastest growing platforms – both of which are running.
  • It’s worth noting that these two platforms accounted for nearly half of NKE’s growth domestically over the past year. Particularly given that the NKE Free platform only started selling through Europe less than 6-months ago (March/April), which we expect to continue to help offset macro headwinds.
  • The ‘other’ platform compiled of all orphan lines and new launches was next followed closely by Jordan. It’s worth noting that both of these platforms have had the most significant rate of incremental growth contribution.
  • The ramp in ‘other’ reflects increasing success with new launches suggesting that NKE innovation is as healthy as ever.

 

Note: special thanks to our All-Star intern Ben Ryan (and Forward for the Nashville Predators organization) for his contribution to this  product.

 

NKE: A Rare Glimpse... - NKE PlatRevs

 

NKE: A Rare Glimpse... - NKE IncrRev Plat


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This Is What A Recession Looks Like

A chart is worth 1000 words and these Durable Goods numbers say all that needs to be said.

 

This Is What A Recession Looks Like - durable2

 

This Is What A Recession Looks Like - durable1


NatGas Takes On Coal

Takeaway: Coal is cheap and natural gas is above $3/Mcf; power producers in theory should run more coal and less gas.

 

After an astonishing decline in price over the last three years, natural gas has been slowly recovering, clawing back above the $3 /Mcf mark recently with the October futures contract rolling into November’s contract.

 

 

NatGas Takes On Coal  - coalnatgas

 

 

Coal is another form of energy we have massive quantities of here in the United States and has been wallowing at year-to-date lows recently. The standard in the eastern US, Central Appalachia coal, is at $62/ton right now. As coal sits at this price level and natgas heads higher, the latter could run into some headwinds due to coal becoming competitive from a price perspective for power producers (say that five times fast).

Our Energy Sector Head Kevin Kaiser notes that “...on an energy equivalent basis for a power plant, that’s around $3.20/MMbtu - $3.70/MMbtu.  So as nat gas prices move up into that range, coal becomes increasing competitive, so power companies should in theory run more coal and less gas.”

Keep an eye on natgas heading into the end of the year - coal has the ability to shake things up quite a bit.


JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND?

Takeaway: Initial jobless claims moved sharply lower last week, beginning a trend we expect to run through February.

***The following note comes from our Financials team led by Managing Director Josh Steiner. If you aren't yet receiving their work on the space, including their seminal work on the U.S. housing market, please email sales@hedgeye.com if you're interested in setting up a trial.***

 

 

Seasonality Steals the Driver's Seat

Initial jobless claims fell sharply last week, dropping 26k to 359k from 385k. This was well below consensus estimates for 375k. Rolling initial claims fell 4.5k to 374k. There are a couple possible explanations for the sharp drop. It's possible we're seeing the reversal of a temporary post-Isaac spike. It's also possible that there's a recurring week 38/39 distortion. Note that in 2011 a comparable decline occurred on the same week (there's a one-week mismatch due to the leap year). Regardless the cause, the bottom line is that this put claims back on a path of improvement, which we think is likely to be the dominant trend for the next five months, through February, 2013. We've harped on seasonality a lot, but to again reiterate, we think the two charts below speak for themselves. They illustrate quite plainly that in the last three years, ALL improvement in both initial jobless claims and nonfarm payrolls occurs in the September through February period while March through August stagnates or deteriorates. This seasonality distortion will again be present this year and next year. 

 

So, the question is, aside from the seasonality issue, what's really going on? To answer that question, we look at the YoY trend in rolling non-seasonally adjusted claims. This week, that measure was down 7.9% vs. the same point last year. That compares with a decline of 7.9% in the prior week and 8.3% two periods earlier. Essentially, it's unchanged, which means that the trajectory of improvement is intact, for now.

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 1

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 2

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 3

 

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JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 8
 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 9

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 10

 

JOBLESS CLAIMS DROP SHARPLY - THE BEGINNING OF A TREND? - 11

 

Joshua Steiner, CFA

 

Robert Belsky


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