Trade Idea: Shorting EWQ (France)

Takeaway: Hollande’s socialist agenda will push up the country’s debt level and reduce competitiveness. We expect a rising risk premium.

Positions in Europe: Short France (EWQ); Long German Bonds (BUNL)


Keith added EWQ to our Real-Time Positions at $21.58 on 10/15. EWQ’s immediate term TRADE support is $20.34 and intermediate term TREND resistance is $21.84, which is currently broken to the upside.

 

With regard to the trade Keith said: “Re-shorting a country that has failed in their Keynesian policies to deliver the elixir of GDP growth. France has stagflation instead.”

 

Trade Idea: Shorting EWQ (France) - bb. ewq

 

We’ve long had a skeptical eye on Socialist President François Hollande, beginning with his very loud “tax the rich” campaign slogan and lack of focus on reducing France's fiscal fat. 

 

Late last month Hollande delivered on much of what he promised; the 2013 budget notables included:

  • €10B of spending cuts and €20B of tax increases
  • Tax of 75% on incomes over 1MM EUR
  • Goal to bring the deficit down to 3% of GDP next year from a projected 4.5% this year (vs Spain 4.5%; UK 6.6%; USA 6.3%)
  • +0.8% GDP growth forecast for 2013

We frankly think that both its GDP and deficit reduction targets are overly optimistic.  And with public debt pushing 91% (as a % of GDP), France is above the level of 90% that economists Reinhart and Rogoff have indicated as destructive to growth. 

 

In recent weeks France's business federation has vetted its frustrations with Hollande’s polices.   The group is rightly concerned about a competitiveness drag, including from Article 6 of the new tax law, which raises the top rate of capital gains tax from 34.5% to 62.2%. For reference these levels compare with 21% in Spain, 26.4% in Germany and 28% in Britain.

 

Given its debt drag and the square stagflationary position the economy is in (Q2 GDP Final 0.0% Q/Q and 0.3% Y/Y and CPI registered 2.2% SEPT Y/Y vs 2.4% AUG) we expect not only growth to underperform expectations, but an upward inflection in its relatively stable and low yields (see charts below) alongside a heightened risk profile with a likely downgrade of the sovereign by another main credit agencies this year. [Currently, the Standard & Poor’s has cut France to AA+, while Moody’s and Fitch remain at AAA].

 

Trade Idea: Shorting EWQ (France) - bb. france yields 1

 

Trade Idea: Shorting EWQ (France) - bb . france yield 2

 

The most current data also confirms a sagging economy: French PMI Manufacturing fell to 42.7 SEPT vs 46.0 AUG and Services dampened to 45.0 SEPT vs 49.2 AUG, both below the 50 line indicating contraction. Confidence figures also remain depressed:  Business Confidence (down to flat since March 2012); Consumer Confidence (down since June); and Consumer Spending has been negative (year-over-year) for the last two readings.

 

While Spain is taking the sovereign spotlight light in the Eurozone right now – as rumors swirl today that Madrid is considering requesting a credit line, rather than a full-scale bailout from the ESM, and may qualify for the ECB's OMT – we caution on the rising risk profile of France. We expect growth and competitiveness to take large hits under Hollande’s fist and think combined with the likely downgrade of the sovereign that credit spreads should inflect off their current lows to represent France fiscal imbalances.

 

Matthew Hedrick

Senior Analyst


Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more