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.
Takeaway: Spain’s growth assumption, and therefore budget, is way off! Markets wait for a Spanish bailout.
Positions in Europe: Short EUR/USD (FXE); Long German Bonds (BUNL)
Asset Class Performance:
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:
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%.
The Pain Continues
(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.
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.
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
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.
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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.
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.”
Takeaway: $NKE's setup today is unlike anything we’ve seen in a very long time - hated just when fundamentals improve. Be patient...buy 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.
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.
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.
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:
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.
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.
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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