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Idea Alert: Shorting FXE

Takeaway: Fundamentals and the challenges inherent in the Union of uneven states suggest our $1.31 EUR/USD resistance level will hold.

Positions in Europe: Short EUR/USD (FXE); Short Spain (EWP) 

 

Keith added FXE to our Real-Time Positions at $127.06. FXE’s TRADE range is $126 – 128 with a TREND resistance of $131.

 

With regard to the trade Keith said: “The Euro bounced right where it should have, off the low-end of our immediate-term Risk Range, but remains bearish TREND.”

 

Idea Alert: Shorting FXE - 11. eur usd

 

Our call is that the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain, Greece, and Italy in particular), however ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” and the resolve of Eurocrats to maintain the Union will prevent levels falling anywhere near parity.

 

POLITICS

 

There is still great political uncertainty in Europe right now, which lends support that the EUR/USD will not cross our quantitative long term TAIL line of resistance at $1.31. Further, we believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012.  As a reminder, some of the main topics that Eurocrats are wrestling with are:

  • Setting up a Banking Union (with Pan-European Deposit Insurance)
  • Setting up a Fiscal Union
  • If and when Spain will request another bailout (and will it come from the IMF or ESM, or both?)

In terms of setting up a Banking Union and Fiscal Union, we believe the two are dependent on each other.  While more attention has been given to a Banking Union recently, we believe Eurocrats reaching an agreement on a fiscal union over the near term is incredibly unlikely as countries are unwilling to part with their fiscal sovereignty. This could be one factor to put downside pressure in the cross.

 

On Spain, we think the sovereign asking for a bailout is a question of when and not if. The recent rumor that Spain may look to the IMF for a loan would reflect the likelihood of more favorable terms versus the European Commission and ECB’s ‘conditionality’ for aid via the ESM or OMT.

 

FUNDAMENTALS

 

European fundamentals continue to show a down to ugly trend, looking across PMIs, confidence readings, inflation, retail sales and unemployment rates across much of the region. It’s important to note that even the perceived pocket of strength are revealing weakness, with Germany, France, and the Netherlands notable call-outs.

 

Manufacturing and Services PMIs for October have shown little to no improvement over the last 8-9 straight months, stuck below the 50 line indicating contraction.

 

Idea Alert: Shorting FXE - 11. PMIs

 

Below is notable data out this week:

 

Eurozone CPI 2.5% in OCT Y/Y (above the 2% mandate and should remain so over the intermediate term)

 

Eurozone Industrial Production -2.3% SEPT Y/Y (exp. -2.2%) vs -1.3% AUG  

Eurozone Industrial Production -2.5% M/M vs 0.9% AUG = biggest drop in more than three years

 

Idea Alert: Shorting FXE - 11. industrial prod and retail

 

Eurozone ZEW Economic Sentiment -2.6 NOV vs -1.4 OCT

 

 

Preliminary Q3 GDPwhile many of the core countries beat expectations, growth levels contracted versus the previous quarter and the Eurozone officially slipped into recession:

 

Eurozone -0.6% Y/Y (inline) vs -0.4% in Q2    [-0.1% Q/Q (inline) vs -0.2% in Q2]

Germany 0.9% Y/Y (exp. 0.8%) vs 1.0% in Q2   [0.2% Q/Q (exp. 0.1%) vs 0.3% in Q2]

France 0.2% Y/Y (exp. 0.0%) vs 0.1% in Q2   [0.2% Q/Q (exp. 0.0%) vs -0.1% in Q2]

Italy -2.4% Y/Y (exp. -2.9%) vs -2.4% in Q2   [-0.2% Q/Q (exp. -0.5%) vs -0.7% in Q2]

Netherlands -1.6% Y/Y (exp. -0.5%) vs -0.4% in Q2   [-1.1% Q/Q (exp. -0.2%) vs 0.1% in Q2]

 

Idea Alert: Shorting FXE - 11. eurozone gdp

 

Germany ZEW Current Situation 5.4 NOV (exp. 8) vs 10 OCT

Germany ZEW Economic Sentiment -15.7 NOV (exp. -10) vs -11.5 OCT

 

Idea Alert: Shorting FXE - 11. zew germany

 

UK CPI 2.7% OCT Y/Y (exp. 2.4%) vs 2.2% SEPT  [0.5% OCT M/M vs 0.4% SEPT] – stagflation, continued.

 

Idea Alert: Shorting FXE - 11. uk cpi

 

We think slowing growth, sticky inflation, and the structural flaws inherent in creating a Eurozone will continue to present challenges that should prevent appreciation of the EUR/USD above our TAIL line of resistance at $1.31.  

 

Matthew Hedrick

Senior Analyst


CHART DU JOUR: SINGAPORE FX TAILWIND

LVS’s MBS should get an FX boost in Q4.

 

  • If the current S$/US$ rate of 1.224 stands, it will result in almost a 5% favorable EBITDA impact for LVS’s MBS.
  • Expectations remain low in Singapore.  Q4 MBS estimates were lowered by another 3% following Q3 earnings.
  • After a drop in gaming market share in Q3 mostly due to hold, MBS should see a sequential comeback in Q4.  While both IRs held high in 4Q11, which will no doubt make YoY comparisons challenging, MBS has an easier hold comparison of 3.3% (4Q11) vs. RWS’s hold of 3.9%.

 CHART DU JOUR: SINGAPORE FX TAILWIND - fx2


Trading Off Inventories for Margins

This note was originally published November 15, 2012 at 14:28 in Retail


Apparel retailers are reverting to a margin mean this quarter to an extent that we have not seen in years. As our SIGMA analysis shows, we’re seeing margins revert to zero barrier for many of the larger players oferall, with resulting in flex in the level of inventory relative to sales. The ups the ante for the level of sell-through that is necessary headed into the holiday season.


Our SIGMA charts below will look familiar to most, but for those new to this representation of fundamentals it triangulates the sales/inventory spread (i.e. sales growth minus inventory growth) on the x-axis as well as the year-over-year change in operating margin on the y-axis. Company’s want to be in the upper right (sales outpacing inventory growth with expanding margins) not the bottom right though directional moves within the same quadrant are often more important indicators for future outcomes and when stocks often have the most meaningful moves.


Consider the following:

  1. Mid-tier companies are at a collective inflection point re margins headed into 4Q. In fact, with all but JCP posting less than a +/- 40bps delta, variation in the yy change in margins is the tightest we’ve seen in over 4-years suggesting the likelihood for increased EPS volatility this holiday season particularly in light of top-line compression, or margin give up to support the sales gain.
  2. Our thesis on GPS and M is that the second JCP stops hemorrhaging sales at its current run-rate, it will put incremental pressure on these companies that have been gaining share. If JCP fails to recover – ever (which we think is unlikely) – then that’s bullish for M and GPS. We think in 1-2 quarters JCP’s delta will improve on the margin, and while still bad for JCP, will hurt its peers.

In light of this setup within this mid-tier(ish) space, we like M, GPS, and KSS (post 4Q) on the short-side and WMT long. In other segments of retail, we continue to favor the athletic space (NKE, FINL, FL) as it has such a positive tailwind in the form of a company R&D driven product and marketing cycle.


Trading Off Inventories for Margins - MidTier EPS Surprise History

 

Trading Off Inventories for Margins - MidTier SIGMAs

 

Trading Off Inventories for Margins - MidTier wJCP SIGMAs

 


 

 


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Trading Off Inventories for Margins

Apparel retailers are reverting to a margin mean this quarter to an extent that we have not seen in years. As our SIGMA analysis shows, we’re seeing margins revert to zero barrier for many of the larger players oferall, with resulting in flex in the level of inventory relative to sales. The ups the ante for the level of sell-through that is necessary headed into the holiday season.


Our SIGMA charts below will look familiar to most, but for those new to this representation of fundamentals it triangulates the sales/inventory spread (i.e. sales growth minus inventory growth) on the x-axis as well as the year-over-year change in operating margin on the y-axis. Company’s want to be in the upper right (sales outpacing inventory growth with expanding margins) not the bottom right though directional moves within the same quadrant are often more important indicators for future outcomes and when stocks often have the most meaningful moves.


Consider the following:

  1. Mid-tier companies are at a collective inflection point re margins headed into 4Q. In fact, with all but JCP posting less than a +/- 40bps delta, variation in the yy change in margins is the tightest we’ve seen in over 4-years suggesting the likelihood for increased EPS volatility this holiday season particularly in light of top-line compression, or margin give up to support the sales gain.
  2. Our thesis on GPS and M is that the second JCP stops hemorrhaging sales at its current run-rate, it will put incremental pressure on these companies that have been gaining share. If JCP fails to recover – ever (which we think is unlikely) – then that’s bullish for M and GPS. We think in 1-2 quarters JCP’s delta will improve on the margin, and while still bad for JCP, will hurt its peers.

In light of this setup within this mid-tier(ish) space, we like M, GPS, and KSS (post 4Q) on the short-side and WMT long. In other segments of retail, we continue to favor the athletic space (NKE, FINL, FL) as it has such a positive tailwind in the form of a company R&D driven product and marketing cycle.


Trading Off Inventories for Margins - MidTier EPS Surprise History

 

Trading Off Inventories for Margins - MidTier SIGMAs

 

Trading Off Inventories for Margins - MidTier wJCP SIGMAs

 


 

 


Q&A From Our Morning Investment Call

During the Q&A portion of today's Morning Investment Call, we discuss navigating the markets and the effects of the US political machine on the economy. Hedgeye Risk Manager subscribers get access to our call each morning and the ability to participate in the Q&A session. For more information, click here.

 

 


WMT: Idea Alert. Buying Again.

Takeaway: $WMT's inquiry into the FCPA will cost money, but not the ~$9billion in market cap WMT lost today.

We’re adding WMT back to the long side of our portfolio on today’s selloff.  The print was in-line with our view for a tepid top line, but SG&A and below-the-line items making up for the difference. But to suggest that the stock is trading off 4% because of a perceived weak earnings quality is just plain silly. The 8-K added that “Inquiries or investigations regarding allegations of potential F.C.P.A. violations have been commenced in a number of foreign markets where we operate, including but not limited to Brazil, China and India.”

 

That’s bad enough news to anyone who knows the story, but it sounds a heck of a lot worse when you read out the acronym FCPA – Foreign Corrupt Practices Act.  Not exactly a confidence-inspiring ring to it.

 

All that said, the company will spend money on these inquiries. Millions…tens of millions. Maybe even a hundred+. But the risk of WMT realizing that it has to pull out of a country or severely limit growth outside the US is not in the realm of what we think is realistic. Today alone, the market dinged WMT’s market value by ~$9billion, and pushed the stock within $2 of its long term TAIL support of $66.12.

 

Downside here is minimal, concerns will blow over, and there’s a big call option on WMT if oil rolls. 

 

WMT: Idea Alert. Buying Again. - WMT TTT

 

Call it financial engineering, and better tax planning. We'll call it better better relative EPS growth on a big liquid name.

 

WMT: Idea Alert. Buying Again. - 22


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