The Economic Data calendar for the week of the 1st of October through the 5th 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.




Weekly European Monitor: Spain – Who Cares?

Takeaway: Spain’s growth assumption, and therefore budget, is way off! Markets wait for a Spanish bailout.

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


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


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -2.6% week-over-week vs -0.1% last week. Bottom performers: Cyprus -9.7%; Spain -6.3%; Italy -5.6%; France -5.0%; Greece -4.7%; Portugal -4.2%; Ukraine -4.1%; Belgium -4.0%; Netherlands -3.3%; Germany -3.2%. Top performers: Poland +0.1%; Hungary -0.3%; Czech Republic -1%. [Other: UK -1.9%].
  • FX:  The EUR/USD is down -0.94% week-over-week.  W/W Divergences: NOK/EUR +1.23%; SEK/EUR +1.02%; PLN/EUR +0.46%; GBP/EUR +0.44%; RUB/EUR +0.42%; CHF/EUR +0.20%; DKK/EUR 0.00%; HUF/EUR -1.01%; CZK/EUR -1.12%.
  • Sovereign CDS:  Sovereign CDS were higher on the week. On a week-over-week basis Ireland led the charge at +46bps to 323bps, followed by Portugal +43bps to 517bps, Italy +34bps to 362bps, and Spain +25bps to 392bps.
  • Fixed Income:  The 10YR yield for sovereigns were higher on week for the peripherals with the exception of Greece.  Portugal climbed the most week-over-week at +40bps to 9.00% followed by Spain +39bps to 6.05% and Italy +15bps to 5.17%.  Greece declined a monster -84bps on the week, Germany fell -18bps to 1.42% and France declined -10bps to 2.18%.

Weekly European Monitor: Spain – Who Cares? - ff. 1


Weekly European Monitor: Spain – Who Cares? - ff. 2


Weekly European Monitor: Spain – Who Cares? - ff. 3



Spain – Who Cares?


While Greece in economic terms is a small fry compared to Spain, markets are once again showing the influence that political/economic events in just one country (in this case Spain) can have on global markets. Yet understanding the political developments in Spain this week takes a rather fine-toothed comb and a bit of head scratching on the economic side.


Is Spain asking for a sovereign bailout or not? Is the ESM the funding vehicle by which Spanish banks can tap funds to recapitalize its banks or not?


Both questions are unclear. To the first one, PM Rajoy continues to drag his feet and provide ambiguous responses. 


A few considerations:

  • Rajoy is simply politicking to play the best cards he can get from the ECB via the OMTs.
  • Rajoy see that yields are not astronomical (the 10YR is currently at 6.05% vs a high of 7.58% on 7/24) so there’s no need for a bailout until this changes.
  • Rajoy announced his 2013 budget yesterday (more below) and wants to first test the waters of the newest fiscal consolidation measures on his populous.
  • Rajoy is waiting for the results of the Catalan elections (brought forward to November 25th) before asking for a bailout. [While the chances of an independent Catalonia appear small, the outcome could have an impact on the political mood which Rajoy will have to address].

To the second question on the ESM, finance ministers of Germany, Netherlands, Finland, and Austria stirred up the proverbial pot (and brought further uncertainty) this week when they said they were against allowing the ESM to take over Spain’s current bank recapitalization scheme. Despite the confusion over the language of this statement, the group is for the ESM “financing” the recapitalization, yet against the ESM (and possibly EFSF) subordinating bond holders in the event of a restructuring. 


On Spain’s 2013 Budget

On Thursday Spain released its 2013 Budget.  It’s hard to say why the U.S. market bounced on the news (the S&P500 closed up +0.95% on the day) but the IBEX closed down -0.2% on the day. Below are some of the notable tenants of the budget, however what’s critical is the government’s assumption for growth next year was unchanged at -0.5%.


Consensus has 2013 growth down at -1.3 to -1.6% and we think it could be closer to -2%!  In short, slower growth will reduce tax revenues and prevent Spain from hitting its deficit target (from 6.3% this year to 4.5% next). You only have to look to 2011 to see how off the target the government has been: it once estimated the 2011 deficit to be 8% vs the most recently stated 8.9%.

  • €13 billion ($16.7 billion) of spending cuts and tax increases for 2013 and said it will place new limits on early retirements.
  • 58% of the budget adjustment will come from spending cuts, 42% from income measures.
  • Increases taxes on lotteries, short-term capital gains, extended a wealth tax, and scraps rebates for large companies and mortgage holders.
  • Goal, as presented in July, is designed to cut the deficit by €65 billion through the year 2014.
  • Rajoy is chopping €40 billion from his ministries.
  • Rajoy took €3B from the €67B pension reserve fund to boost payment for retirees. 1% increase in 2013.
  • Budget plan will reduce the deficit to 4.5% of GDP in 2013 from the targeted 6.3% in 2012.


On forecasts:

  • 'Soft' recession in 2013 with GDP (0.5%) = unchanged vs previous estimates.
  • Hopes 2013 will be last year of recession.
  • See's jobless rate at the end of 2013 at 24.3% vs 24.6% at the end of 2012.
  • An increase of more than 30% in debt-servicing costs next year.


The Pain Continues    

  • Spain has over €40B in debt maturities (principal + interest) coming due in the next two months alone.
  • Bank of Spain noted that bad loans held by Spanish banks hit a fresh record high in July. Non-performing loans rose to €169.3B in July, or 9.9% of outstanding credit, from €168.4B in July, or +9.4%.
  • July bank deposits in Spain were €1.287T, down 7.8% Y/Y.
  • Egon-Jones cut Spain’s sovereign credit rating to CC from CC+.
  • Today’s audit release from Oliver Wyman’s stress tests of 14 Spanish banks showed a capital deficit of €59.3B, just shy of the €60B expected:
    • Bankia was a notable underperformer with a €24.7B capital deficit shortfall.
    • Banco Popular Espanol had a €3.2B shortfall.
    • Notable lenders without capital needs included: Banco Santander SA, Banco Bilbao, and Banco Sabadell SA.

(Note: Oliver Wyman assumed a real decline in GDP of -4.1% in 2012, -2.1% in 2013 and -0.3% in 2014. It estimated that unemployment would keep rising to 27.2% in two years’ time and the tests factored in the Spanish 10YR yield of 7.4% this year and 7.7% in 2013 and 2014.)


One saving grace in the Spanish drama may be Germany. After all, its banks have the highest exposure in Europe to Spain, at $139.9B, of which $45.B alone is exposure to banks. While the figure is under the cap sum of €190B Frau Merkel pledged via the ESM, we still believe that fear of the repercussions of a Spanish default on the broader region and economy outweighs letting Spain fail in the mind of Merkel.


Otherwise, it’s pretty clear to us that Spain is hostage to the market, which will surely be pricing its debt higher, and that the government is underfunded to take care of its bank recapitalization alone. As always, fears from the sovereign will play into the perceived health of its banks and vice versa. While we can’t pin-point an additional bailout for Spain, we think one is inevitable, and probably before year-end.


Weekly European Monitor: Spain – Who Cares? - ff. 4






Our immediate term TRADE range for the cross is $1.27 to $1.29. Our long-term TAIL line of resistance is $1.31.  While Draghi’s “unlimited” promise has boosted the currency pair, we see a heavy line of resistance at our TAIL resistance level that we do not expect to be overcome. We’re currently short the EUR/USD via the etf FXE. 


In the second chart below we look at CFTC data for net contracts of Euro non-commercial positions. Interestingly, since a high in short positions in the Euro on 6/5/12 (-213.060 contracts), investors have been less bearish (and covering). Week over week, contracts are 18% less bearish, -95,080 to -77,671 as of 9/18. 


Weekly European Monitor: Spain – Who Cares? - FF. 5


Weekly European Monitor: Spain – Who Cares? - ff. 6



Data Dump:


Eurozone Business Climate -1.34 SEPT vs -1.18 AUG

Eurozone Consumer Confidence -25.9 SPET Final (inline)

Eurozone Economic Confidence 85 SEPT vs 86.1 AUG
Eurozone Industrial Confidence -16.1 SEPT vs -15.4 AUG

Eurozone Services Confidence -12 SEPT vs -10.8 AUG

Eurozone M3 2.9% AUG Y/Y vs 3.6% JUL

Eurozone CPI Estimate 2.7% SEPT Y/Y vs 2.6% AUG


Germany CPI (Preliminary) 2.1% SEPT Y/Y vs 2.2% AUG

Germany Import Price Index 1.3% AUG M/M (exp. 0.8%) vs 0.7% JUL   [3.2% AUG Y/Y (exp. 2.7%) vs 1.2% JUL]

Germany Retail Sales -0.8% AUG Y/Y vs -1.6% JUL

Germany IFO Business Climate 101.4 SEPT (exp. 102.5) vs 102.3 AUG [falls for a 5th consecutive month]

Germany IFO Current Assessment 110.3 SEPT (exp. 111) vs 111.1 AUG

Germany IFO Expectations 93.2 SEPT (exp. 95) vs 94.2 AUG

Germany GfK Consumer Confidence 5.9 OCT (exp. 5.9) vs 5.9 SEPT

Germany Unemployment Change 9K SEPT vs 11K AUG [increased for a sixth month]

Germany Unemployment Rate 6.8% SEPT vs 6.8% AUG


UK Q2 GDP FINAL -0.4% Q/Q (initial -0.5%) and -0.5% Y/Y (inline)


France Consumer Confidence 85 SEPT vs 86 AUG

France Q2 GDP Final 0.0% Q/Q (UNCH) and 0.3% Y/Y (UNCH)

France Own-Company Production Outlook -6 SEPT vs -7 AUG

France Production Outlook Indicator -52 SEPT (exp. -44) vs -44 AUG

France Business Confidence 90 SEPT (exp. 89) vs 90 AUG

France Producer Price 2.6% AUG Y/Y vs 1.3% JUL

France Consumer Spending -0.5% AUG Y/Y vs 1% JUL


Italy Retail Sales -3.2% JUL Y/Y vs -0.5% JUN

Italy CPI (Preliminary) 3.4% SEPT Y/Y vs 3.3% AUG

Italy PPI 3% AUG Y/Y vs 2.2% JUL

Italy Hourly Wages 1.6% AUG Y/Y vs 1.5% JUL

Italy Consumer Confidence 86.2 SEPT (exp. 86) vs 86.1 AUG

Italy Business Confidence 88.3 SEPT vs 87.3 AUG

Italy Economic Sentiment 75.5 SEPT vs 79 AUG


Spain CPI (Preliminary) 3.5% SEPT Y/Y vs 2.7% JUL

Spain Producer Prices 4.1% AUG Y/Y vs 2.6% JUL

Spain Total Housing Permits -37.1% JUL Y/Y vs -49.7% JUN

Spain Retail Sales -2.1% AUG Y/Y vs -7% JUL


Belgium CPI 2.76% SEPT Y/Y vs 2.86% AUG


Netherlands Q2 GDP Final -0.4% Y/Y (vs original -0.5%) and 0.2% Q/Q (inline)

Netherlands Producer Confidence -6.7 SEPT vs -4.6 AUG


Austria Industrial Production 2% JUL Y/Y vs 0.3% JUN

Austria Producer Price Index 1% AUG Y/Y vs 0.2% JUL


Switzerland UBS Consumption Indicator 1.03 AUG vs 1.48 JUL

Switzerland KOF Swiss Leading Indicator 1.67 SEPT vs 1.59 AUG


Portugal Consumer Confidence -51.4 SEPT vs -49.2 AUG

Portugal Economic Climate -4.2 SEPT vs -4 AUG

Portugal Industrial Production -2.2% AUG Y/Y vs -0.3% JUL

Portugal Retail Sales -6.1% AUG Y/Y vs -7.7% JUL


Ireland Property Prices -11.8% AUG Y/Y vs -13.6% JUL


Sweden Consumer Confidence 2 SEPT vs 5.4 AUG

Sweden Manufacturing Confidence -10 SEPT vs -9 AUG

Sweden Economic Tendency Survey 95.8 SEPT vs 96.9 AUG

Sweden PPI -1.9% AUG Y/Y vs -1.1% JUL

Sweden Household Lending 4.6% AUG Y/Y vs 4.5% JUL

Sweden Retail Sales 1.8% AUG Y/Y vs 2.3% JUL


Norway Retail Sales 2.7% AUG Y/Y vs 2.7% JUL

Norway Unemployment Rate 2.4% SEPT vs 2.6% AUG


Finland Business Confidence -8 SEPT vs -9 AUG

Finland Consumer Confidence 3.4 SEPT vs 0.5 AUG

Finland PPI 1.5% AUG Y/Y vs 0.2% JUL

Finland Unemployment Rate 7.3% AUG vs 6.9% JUL


Greece Retail Sales -8% JUL Y/Y vs -9.6% JUN


Poland Retail Sales 5.8% AUG Y/Y vs 6.9% JUL

Poland Unemployment Rate 12.4% AUG vs 12.3% JUL


Hungary Unemployment Rate 10.4% AUG vs 10.5% JUL

Czech Republic Business Confidence 2.7 SEPT vs 2.4 AUG

Czech Republic Consumer and Business Confidence -3.8 SEPT vs -3.6 AUG

Czech Republic Consumer Confidence -29.8 SEPT vs -27.3 AUG


Slovakia Consumer Confidence -31.6 SEPT vs -25.9 AUG
Slovakia Industrial Confidence -0.3 SEPT vs -4.7 AUG

Slovakia PPI 4.1% AUG Y/Y vs 3.6% JUL

Slovenia CPI 3.3% SEPT Y/Y vs 2.9% JUL


Turkey Foreign Tourist Arrivals 9.7% AUG Y/Y vs -0.6% JUL



Interest Rate Decisions:


(9/25) Hungary Base Rate Announcement CUT 25bps to 6.50%



The European Week Ahead:


Monday: Sep. Eurozone PMI Manufacturing - Final; Aug. Eurozone Unemployment Rate; Sep. Germany PMI Manufacturing – Final; Sep. UK PMI Manufacturing; Aug. UK Net Consumer Credit, Net Lending Sec. on Dwellings, Mortgage Approvals, M4 Money Supply; Sep. France PMI Manufacturing – Final; Sep. Italy PMI Manufacturing, New Car Registrations, Budget Balance; Aug. Italy Unemployment Rate Preliminary; Greece Manufacturing PMI


Tuesday: Aug. Eurozone PPI; Sep. UK House Prices; PMI Construction; BRC Shop Price Index


Wednesday: Sep. Eurozone PMI Composite and Services - Final; Aug. Eurozone Retail Sales; Sep. Germany PMI Services – Final; Sep. UK PMI Services, Official Reserves; Sep. France PMI Services – Final; Sep. Spain Services PMI; Sep. Italy PMI Services


Thursday: Oct. Eurozone ECB Announces Interest Rates; Oct. Germany BoE Asset Purchase Target, BoE Announces Rates; Sep. UK New Car Registrations; 2Q BoE Housing Equity Withdrawal


Friday: Aug. Germany Factory Orders; Aug. Spain Industrial Output



Matthew Hedrick

Senior Analyst

Silver Continues To Climb

Gold may be more popular in the mainstream media but silver is where speculators are allocating capital. The metal continues to trend higher thanks to Bernanke's easing methods and year-to-date, the SLV ETF is up +23.6% compared with GLD which is only up +9.1% during the same time period.


The chart below shows the price of spot silver over the years.


Silver Continues To Climb - silverchart

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BYI: King Of Content

Takeaway: BYI's announcements at G2E next week should be a long-term positive catalyst. Management has a positive outlook for the road ahead.

Bally Technologies (BYI) will likely provide a bullish outlook to investors next week at industry gaming event G2E, backing it up with strong content and new devices. Hedgeye Gaming, Leisure and Lodging Sector Head Todd Jordan has been out in Las Vegas this week meeting with Bally management and discussing all segments of their business.


Management has told us they’re very bullish on not just upcoming content but their outlook for future quarters as well. This is the kind of optimism we like to see at a company. The stock has done well relative to its competitors and is up nearly +25% year-to-date. Right now we’re not making any calls on their September quarter; we’re essentially in-line with expectations and think next week’s G2E announcements could be a positive long-term catalyst.



BYI: King Of Content  - slotsups



Jordan highlights some data points from high trip to Vegas and meeting with BYI below:


“We’re usually sober regarding the pre-G2E commentary and glowing press releases regarding each company’s upcoming G2E exhibits.  What’s different for BYI is that this historically reel spinning slot supplier is going to display mostly video content that has apparently been getting great feedback from customers.  Remember that approximately 80% of units shipped are video and unbeknownst to most investors, BYI’s recent slot shipments have also been around 80% of total.  So their video content is already driving higher share recently and with what they are going to show at G2E, will likely increase their high teens overall share.  This is not your father’s Bally Gaming.”

NKE: Its Hated

Takeaway: $NKE's setup today is unlike anything we’ve seen in a very long time - hated just when fundamentals improve. Be red.


Nike’s setup today is unlike anything we’ve seen in a very long time. It’s fundamentals are showing signs of stabilization, with a) an exceptionally strong footwear business offsetting week apparel in China and parts of Europe, and b) gross margins finally headed back up again after many quarters missing expectations, a) inventories getting back into balance with an outline. But at the same time we’re seeing the worst sell side sentiment Nike has seen in 14 years. 

It’s not enough for us to simply take those two factors and buy the stock. Last I check stocks on trade on a two factor model. Ours uses about another 25. Over the past three weeks we’ve been advising clients to trade around a range of $96 to $101, which is served us and them quite well. The problem however is that once Nike broke down through $96, a number starting with an eight is in play. From the fundamental standpoint I can point to zero reasons why it will get there.  But near-term irrational stock moves don’t happen based on fundamentals.


NKE: Its Hated - NKE TTT


Sentiment: So what has Sell-side sentiment so bad? Currently only 37% of the ratings are Buy. What’s funny is that if Wall Street coverage was accurate there would be a fairly even distribution of readings across the buy sell and hold spectrum. Nike however usually has a buy ratio between 90% and 100% percent. Just three months ago it’s ratio hit a recent low of 75% and has since been cut in half to 37%. Just put this into context this is a ratio that’s just slightly above that of JCPenney one of the worst companies and retail right now.


NKE: Its Hated - NKE JCP Sent


SIGMA: Those who track our Sigma analysis will immediately see that Nike has swung right up to quadrant four of our chart. This is a very critical move in that for the past nine quarters Nike’s positioning on this quadrant has moved either down or to the left, both of which are bad. Were often asked what the most favorable move is for company in this analytical framework, and the answer is clear. It’s the one that Nike just did. It’s when sales begin to grow faster than inventories and the rate of degradation in margins begins to ease. This is a prime set up for improvement into the sweet spot for the next four quarters. That’s when stocks work in retail.


NKE: Its Hated - NKE S


But again as noted from a risk management standpoint we have to be very careful here. The stock is clearly broken down below its key support level and will be looking to add it back to our real-time positions on red.

Here’s some other puts and takes in the quarter which we thought were notable:

  • This is more of a company fluff statistic but we still find it notable how every participating nation in the Olympics sent at least one woman and that 44% of all athletes were women in the Olympic Games. That is obviously great news for a secular trend of increased sports participation for women on a global scale. This helps Nike. Not next week, not next month, but a very big long-term positive.
  • China futures down six by no means is positive, but on the two-year run great it was actually a slight improvement from the +2% that Nike put up last quarter.
  • Nike Japan posted this +7% growth rate in futures which is the first time in forever that we’re seeing growth over there. Granted, “comps are easy” but Nike has been unable to “comp the easy comp” for the better part of a decade in Japan.
  • Gross margins compressed by -80bps reflecting benefit from pricing and cost initiatives that were more than offset by higher input costs for materials and labor and mix shift to lower margin businesses. However, the company did not highlight the impact of the expensing – as opposed to amortization – of tools and molds associated with its digital running gear. They could have ‘explained away’ a good 50bps of margin hit there.
  • In looking at regional performance:
    • North America revs came in up +23% (footwear +20%, apparel +26%)
    • Western Europe revs increased by +6% driven by running, basketball and football
    • Eastern Europe revs were up by +16% driven by Russia and Turkey and running
    • China revs increased by +7% with double-digit growth in running, basketball and action sports. Apparel was down -1%. Definitely gave the impression on the call that after the initial market-led slowdown, Nike is taking the initiative to tighten its order book to improve the quality of business. Two thoughts on this 1) Let’s give them credit. They might have stuffed the channel, but at least they’re taking the steps to unstuff it. 2) This is reminiscent of Nike circa 2000/01 when Nike had this same problem in the US market.  Its subsequent actions have had a lasting impact, and are arguably the bedrock for the numbers we see today.
    • Emerging market revs were up +22% driven by running, football, and sportswear. That said we were disappointed to see emerging markets futures come in at +9% on a reported basis (14% Constant Currency). Those are decent enough growth numbers, but the reality is that emerging markets should be putting up mind-bending growth figures.

In a note earlier this week “NKE: A Rare Glimpse,” we looked at the breadth of platform engines driving NKE’s top-line. Free and Dual Fusion are the fastest growing. In fact, these two platforms accounted for nearly half of NKE’s domestic growth over the past year. This is particularly notable 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 persistent macro headwinds.


NKE: Its Hated - NKE PlatRevs


NKE: Its Hated - NKE IncrRev Plat



BKW: Dethroning The King

Takeaway: BKW has to deal with myriad factors including franchisees, higher commodity prices and competition from MCD, BKC and WEN.

Keith shorted Burger King (BKW) in our Real-Time Positions this week. The quantitative setup fell into place, with BKW trading near the top of its TRADE range and our bearish fundamental thesis remains intact. We covered the short on the 26th and booked a gain.



BKW: Dethroning The King - BKW levels



Our Bearish Fundamentals Thesis:


Burger King Worldwide is a stock we have been bearish on since the deal was announced. We remain negative on TRADE, TREND, and TAIL durations. The title of our first note (4/10/12) on BKW was "Too Big To Fix?". In that note we expressed skepticism that the myriad issues that had dogged the chain for a decade had been conclusively resolved - without necessary capital investment - by the new owners over the 18 months prior to its most recent IPO. 


A conference call we held following our initial note on Burger King was called "The Latent Risks of Heavily Franchised Business Models" and discussed deep issues affecting the Burger King franchisee base. We calculated that operators within Carrols franchisee base pay out roughly 50% of their store-level cash flow back to the franchisor. The takeaway is that there is very little cash flow available for the franchisee to invest in his/her own business.


Other issues include:


1. Probable continuation of higher beef prices over the next few years due to supply issues

2. "Obamacare" could also add to financial strain on system in coming years

3. McDonald's is aggressively protecting its share from WEN and BKC

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