Weekly European Monitor: Groundhog Day

Takeaway: The loop of Eurocrat indecision, again. Greece will get its handouts as officials prize maintaining the Union’s status quo.

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


Positions in Europe: Short EUR/USD (FXE)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +4.0% week-over-week vs -2.7% last week. Top performers:  Cyprus +13.9%; Greece +6.9%; Finland +6.2%; France +5.4%; Italy +5.3%; Germany +5.1%; Belgium +4.6%; Sweden +4.4%; Spain +4.0%.  Bottom performers:  Hungary -3.0%; Slovakia -0.9%; Romania +0.4%; Czech Republic +0.7%. [Other: UK +3.8%].
  • FX:  The EUR/USD is up +1.84% week-over-week vs +0.17% last week.  W/W Divergences:  PLN/EUR +1.15%; HUF/EUR +0.89%; CZK/EUR +0.83%; SEK/EUR +0.64%; NOK/EUR +0.40%; RUB/EUR +0.33%; CHF/EUR +0.07%; DKK/EUR +0.01%; RON/EUR -0.07%; ISK/EUR -0.43%; GBP/EUR -0.84%; TRY/EUR -1.48%.
  • Fixed Income:  The 10YR yield for sovereigns across the periphery were down week-on-week. Greece declined the most at -94bps to 16.44%, followed by Portugal -87bps to 7.91%, Spain -21bps to 5.68%, and Italy -10bps to 4.78%. France saw the largest gain at +9bps to 2.16% and Germany gained +7bps to 1.42%. 

Weekly European Monitor: Groundhog Day - 33. yields


EUR/USD: Today Keith added FXE short for a second time to our Real-Time Positions at $128.97. Our EUR/USD TRADE range is $1.26 – 1.28 with a TREND resistance of $1.31.


  • Our call - 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.
  • We believe there is a high likelihood that no significant policy action comes in the remaining weeks of 2012, which could support the band the cross has been trading in over the last weeks.

Weekly European Monitor: Groundhog Day - 33. EURUSD


Weekly European Monitor: Groundhog Day - 33. cftc



Groundhog Day:


“You want a prediction about the weather? You’re asking the wrong Phil. I’ll give you a winter prediction: It’s gonna be cold, it’s gonna be grey, and it’s gonna last you for the rest of your life.”

-From the film Groundhog Day


No agreement was reached from Tuesday’s Eurogroup and IMF on a debt reduction package for Greece. The impasse signals to us a couple of things:

  1. Eurocrats will continue to react to crises by calling meetings and summits, however the “announced solutions” will continue to have little to no substance or won’t work, which will set into motion a repeat “crisis” further down the road, hence the reference to the film Groundhog Day. In particular, we think the inability of member countries to give up their fiscal sovereignty in order to create a Fiscal Union will be a significant stumbling block.
  2. Eurocrats are squarely on board to save in the first order their own jobs and in the second order the idea of a Union of uneven states; therefore we expect them to do all that’s necessary to keep up the Union’s status quo. In short, this means Greece will get its bills paid and you can bet that some form of restructuring of its sovereign debt is inevitable. While the market may cheer this on, suspending reality in Greece will only further divide the Union and perpetuate the uneven footing the states are bound on.

The rumor is now that a resolution on Greece’s debt, which will put the payment of its next bailout tranche ($31.5B) in motion, could come as soon as this Monday, 11/26. But don’t hold your breath! Here’s a quick update on the Greek developments:

  • Sticking Points = the IMF wants Greece's debt burden to fall to 120% of GDP by 2020, while the Eurogroup believes that 2022 is a more realistic date for that debt target. The fund has also pushed for an official sector restructuring to improve Greece's debt sustainability. However, there is no consensus in the Eurogroup for a haircut, which Germany has said is illegal.
  • Remedy Options Under Consideration = one measure revolved around a 10-year suspension of interest payments on loans to Greece from the EFSF. It said that this would result in €44B of savings. It added that there is also a possibility that the interest rate on loans to Greece from Eurozone countries could be reduced to 0.25% from 1.5%, though it added that Germany was opposed to such a step.


Another signal this week that it’s Groundhog Day, Moody’s downgraded France's government bond rating by one notch to Aa1 from Aaa citing an uncertain fiscal outlook, deteriorating economy in the short-term, and longer-term structural rigidities. This came as no great surprise and was a repeat of S&P’s decision to downgraded France back in January.


The move by two leading credit ratings agencies however begs the questions, should the ESM and EFSF facilities also be downgraded, with the second largest backer to Germany losing its AAA status. We think the answer is yes but would further suggest that given the level of central bank intervention in markets, AA is new AAA.


Finally, gear up for a Spanish regional election in Catalonia on Sunday, a region with a long history of succession desires given its bend towards cultural and economic independence (more below under “Call Outs”).



The European Week Ahead:

Sunday: Regional Election in Spain’s Catalonia


Monday: Eurozone Finance Ministers may sign off on Greece’s next bailout tranche (31.5B EU); ECB's Constancio Speaks in Berlin; Dec. Germany GfK Consumer Confidence Survey; Oct. Germany Import Price Index; Nov. UK Nationwide House Prices (Nov. 26-29); Sep. Spain Mortgages-capital loaned, Mortgages on Houses; Nov. Italy Consumer Confidence


Tuesday: Nov. Eurozone OECD Economic Outlook; Sep. UK Index of Services; 3Q UK GDP, Private Consumption, Government Spending, Gross Fixed Capital Formation, Exports, Imports and Total Business Investment – Preliminary; Oct. France Jobseekers; Oct. Italy Hourly Wages; Spain AFME 4th Annual Spanish Funding Conference in Madrid; Oct. Spain Budget Balance


Wednesday: Oct. Eurozone M3; Nov. Germany CPI – Preliminary; Oct. Spain Retail Sales


Thursday: Nov. Eurozone Consumer Confidence – Final, Services Confidence, Business Climate Indicator, Industrial Confidence; Nov. Germany Unemployment Change, Unemployment Rate; Nov. UK CBI Reported Sales, GfK Consumer Confidence Survey, Oct. UK Net Consumer Credit, Net Lending Sec. on Dwellings, Mortgage Approvals, M4 Money Supply; Sep. Spain Total Housing Permits; Nov. Italy Business Confidence; Economic Sentiment


Friday: Nov. Eurozone CPI Estimate; Oct. Eurozone Unemployment Rate; Oct. Germany Retail Sales; Oct. France Producer Prices, Consumer Spending; Nov. Spain CPI - Preliminary; Sep. Spain Current Account; Nov. Italy CPI - Preliminary; Oct. Italy Unemployment Rate – Preliminary, PPI, 3Q Italy Unemployment Rate; Sep. Greece Retail Sales



Extended Calendar:

DEC 1 –                 Beginning of the Russian Presidency of G20

DEC 3 –                 Eurogroup Meeting in Brussels

DEC 6 –                 ECB Governing Council Meeting

DEC 12-13 –        First public consultation between the Russian government, B20 Coalition and international civil society representatives on G20 agenda for 2013 (in Moscow)

DEC 20 –               ECB Governing and General Council Meeting

APR 2013 –          Parliamentary elections in Italy

MAY 2013 –        Presidential elections in Italy



Call Outs:


UK - BOE Minutes: voted 9-0 to keep interest rates on hold, 8-1 to maintain current asset purchases target.


Spain - Newspaper polls last Sunday showed that CiU, the Catalan nationalist party, will win the closely watched regional parliamentary elections this Sunday (25-Nov), but will not gain an absolute majority. It added that the pro-independence party of President Artur Mas is expected to win 60-64 seats in the Catalan parliament, little changed from the 62 seats it currently holds, but short of the 68 seats needed for an absolute majority. According to the article, an absolute majority would give the government more legitimacy in its ongoing battle with Madrid for independence.


Spain - Spanish Prime Minister Rajoy warned that a vote for Catalan independence risked excluding the region from the EU (recall that the Rajoy administration has repeatedly argued that a Catalan referendum on independence is illegal). However, the article noted that Catalan President Artur Mas would consider pursuing a separation from Spain even if an independent Catalan state were denied EU membership. His chief of staff, Joan Vidal de Ciurana, told Bloomberg that Catalonia would not need Spain's Treasury for funding if it had the possibility to become a state and negotiate directly with the markets.


Germany - Bloomberg noted that Europolis, a German citizen group, filed a lawsuit over the ECB's new intervention program at the EU General Court. The article said that the plaintiffs have asked the court to declare the OMT to be incompatible with EU law. It added the case is the sixth challenging the ECB to reach the EU's two top courts.



Data Dump:


Eurozone PMI Manufacturing 46.2 NOV Prelim (exp. 45.6) vs 45.4 OCT

Eurozone PMI Services 45.7 NOV Prelim (exp. 46) vs 46 OCT

Eurozone PMI Composite 45.8 NOV Prelim (exp. 45.7) vs 45.7 OCT


Eurozone Construction Output -2.6% SEPT Y/Y vs -1.4% AUG

Eurozone Consumer Confidence -26.9 NOV (exp. -25.9) vs -25.7 OCT


Germany Q3 GDP Final UNCH vs Previous 0.2% Q/Q and 0.9% Y/Y

Germany Domestic Demand 0.0% in Q3 (inline) vs -0.4% in Q2

Germany Exports 1.4% in Q3 (exp. 1.0%) vs 3.3% in Q2

Germany Imports 1.0% in Q3 (exp. 0.5%) vs 2.2% in Q2

Germany Capital Investment 0.2% in Q3 (exp. -0.1%) vs -2.1% in Q2

Germany Govt Spending 0.4% in Q3 (exp. 0.2%) vs -0.2% in Q2

Germany Construction Investment 1.5% in Q3 (exp. 0.8%) vs -1.1% in Q2

Germany Private Consumption 0.3% in Q3 (vs 0.2%) vs 0.1% in Q2


Germany IFO Business Climate 101.4 NOV (exp. 99.5) vs 100 OCT

Germany IFO Current Assessment 108.1 NOV (exp. 106.3) vs 107.2 OCT

Germany IFO Expectations 95.2 NOV (exp. 93) vs 93.2 OCT


Weekly European Monitor: Groundhog Day - 33. IFO


Germany PMI Manufacturing 46.8 NOV Prelim (exp. 46) vs 46 OCT

Germany PMI Services 48 NOV Prelim (exp. 48.3) vs 48.4 OCT

Germany Producer Prices 1.5% OCT Y/Y vs 1.7% SEPT


France PMI Manufacturing 44.7 NOV Prelim (exp. 44) vs 43.7 OCT

France PMI Services 46.1 NOV Prelim (exp. 45) vs 44.6 OCT


France Own-Company Production Outlook -7 NOV vs -9 SEPT

France Production Outlook -40 NOV vs -55 SEPT

France Business Confidence 88 NOV vs 85 September


UK BBA Loans for House Purchase 33,039 OCT vs 31,544 September


Italy Retail Sales -1.7% SEPT Y/Y (exp. -1.1%) vs -1.1% AUG

Italy Industrial Orders NSA -12.8% SEPT Y/Y vs -9.0% AUG


Spain Producer Prices 3.5% OCT Y/Y vs 3.8% SEPT

Portugal Producer Prices 4.6% OCT Y/Y vs 4.5% SEPT

Austria Industrial Production 2.3% SEPT Y/Y vs 3.8% AUG


Switzerland Exports -16.5% OCT M/M vs 2.9% SEPT [Watch exports +9.3% Y/Y in real terms; +13.2% Y/Y in nominal terms]

Switzerland Imports -8.2% OCT M/M vs 4.6% September

Switzerland M3 Money Supply 8.6% OCT Y/Y vs 8.8% SEPT


Denmark Retail Sales -1.4% OCT Y/Y vs -2.8% SEPT

Denmark Consumer Confidence Indicator -1.3% NOV vs -5.5% OCT

Netherlands Consumer Spending 0.0% SEPT vs -1.8% AUG

Netherlands House Price Index -7.8% OCT Y/Y vs -7.9% SEPT


Norway Q3 GDP 0.7% Q/Q vs 0.8% in Q2

Finland Unemployment Rate 6.9% OCT vs 7.1% September


Poland Core CPI 1.9% OCT Y/Y vs 1.9% SEPT

Slovenia PPI 0.8% OCT Y/Y vs 0.7% September

Hungary Avg Gross Wages 3.7% SEPT Y/Y vs 3.8% AUG

Bulgaria Unemployment Rate 11% OCT vs 10.6% SEPT


Russia Foreign Direct Investment 4.6% in Q3 vs 8.0% in Q2

Russia Unemployment Rate 5.3% OCT vs 5.2% September

Russia Disposable Income 2.4% OCT Y/Y vs 3.8% September

Russia Real Wages 5.2% OCT Y/Y vs 4.7% September

Russia Retail Sales 3.8% OCT Y/Y vs 4.4% SEPT
Russia Investment in Production Capacity 4.9% OCT Y/Y vs -1.3% September


Turkey Foreign Tourist Arrivals 0.4% OCT Y/Y vs 1.7% SEPT



Interest Rate Decisions:


(11/20) Turkey Benchmark Rep Rate UNCH at 5.75%

(11/20) Turkey Overnight Lending Rate CUT 50bps to 9.00%



Matthew Hedrick

Senior Analyst

UNH: Get Shorty


We present to you the final installment of our videos from last week’s Best Ideas call that Hedgeye held for its institutional subscribers. Healthcare Sector Head Tom Tobin is looking to short UnitedHealth Group (UNH) for multiple reasons that include: 


-Utilization has been negative: cost trend has been negative for the last 3 years. While some medical spending is discretionary, underlying demand is unlikely to remain negative for long.


-Costs are likely to accelerate: Our forecast of physician office visits and maternity suggest a recovery is ongoing.


-Affordable Care Act creates problems: The Affordable Care Act creates a host of market uncertanties and has a high probability of being disruptive to the health insurance market.


Watch the video we’ve posted for Tobin’s full rundown on UNH.


It All Adds Up

Client Talking Points

It All Adds Up

You can put together clues like a detective to come up with a thesis on where things are headed and how markets interact with each other. Get the EUR/USD right and guess what? You’re going to get some other things right, too. In this case, we think it’s a good time to short the Euro with the EUR/USD at $1.286 - up against our TRADE line of resistance. The time is also right to short high-beta stocks and commodities while buying up bonds and the US dollar. 

Lowering Expectations

The days of decent (read: >3% a year) GDP growth are now behind us. We’re on track for a growth number akin to 1.4% a year and adjusted growth of 0.9%. That can be hard to swallow but sometimes the truth isn’t what you want to hear. Our macro theme of #GrowthSlowing continues to press on and coalesce into the #EarningsSlowing game. Despite all the negative data points we continue to see, housing is actually offering a glimmer of hope as mortgage applications pick up and the glut of supply begins to shrink. Despite the good news, however, we have a long way to go before we’re back to the way things used to be before the financial crisis; it won’t be an easy journey.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“Locked eyes with the security guard at Brookstone. He knew that I would take his life before surrendering this vintage gumball machine.” -@ReformedBroker



“Traditions are group efforts to keep the unexpected from happening.” -Barbara Tober


Hurricane Sandy may ultimately deliver $240 billion in reconstruction and rebuilding costs helping to drive US economic growth.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.68%

Parabolic Recoveries

This note was originally published November 23, 2012 at 08:29 in Early Look

“The last of human freedoms - the ability to chose one's attitude in a given set of circumstances."

-Viktor Frankl


Typically over Thanksgiving, I head over to Keith’s house and join his family for a masterfully prepared feast by his wife.  This year they’ve headed out of town, so I joined some friends on an impromptu basis in Williamsburg, Brooklyn.  No, I didn’t don skinny jeans for the adventure, but I did experience a gluten-free Thanksgiving for the first time.


As a Canadian in the United States, I have always been thankful for the great American holiday of Thanksgiving.  It is the ideal opportunity to reconnect with old friends and establish new friendships.  And if you are a fan of the correct NFL team, it is also a chance to cheer your team to victory.  Unfortunately, for those fans of the New York Jets, the last point doesn’t exactly hold.


Given the elongated nature of the holiday this year, I’ve also been doing some reading for pleasure and have picked up Viktor Frankl’s best-selling book, “Man’s Search for Meaning.”  For those that haven’t read this great book, it is basically the story of Frankl’s time in the Nazi German concentration camps.  The gist of the book is that humans can, and should, find meaning in even the most sordid of situations.


It goes without saying that we have had a relatively negative outlook on global growth this year.  Even as a resolution of the Fiscal Cliff becomes possible, we aren’t likely to be persuaded that global growth is set to accelerate.  As it relates to equities, the key issue of tepid economic growth is that the pace of earnings growth will ultimately slow, as it has and is in the United States (one of our key Q3 themes).


Even as bearish as we are and have been on economic activity, we are certainly not as pessimistic as Jeremy Grantham, who wrote the following in his most recent quarterly letter:


“The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.


Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.”


Certainly, Grantham has an impressive long run track record, but there is always danger in predicting out for long time frames.  In this case, Grantham is actually saying that the United State’s historic growth rate of 3% is gone forever.   As much respect as we have for Grantham, we wouldn’t bet against the American people and their ability to innovate and create economic growth in the long run.


In the short term, akin to Frankl’s ideas of finding a positive in the most sordid of situations, housing is starting to become a real positive factor in the U.S. economy.  Our Financials Team led by Josh Steiner has done much of our housing work and on the way down was correct in his analysis that housing would take longer to bottom than consensus expected.  Conversely, on the way up, Steiner is starting to develop the thesis that housing may recover quicker than expected.


The most recent data point on housing was mortgage applications from last week that rose 3.0% week-over-week, which is on the back of a 11.0% increase in the prior week.  In the Chart of the Day, we show mortgage application data going back to 2009.  The key takeaway is that mortgage applications are starting to accelerate on a year-over-year basis.


The conundrum of the housing market for many has been the fact that mortgage applications, and thus purchases, have remained at anemic levels despite all-time lows in interest rates.  In part, of course, this is due to tighter lending standards from banks, but the other key component is psychological.  In effect, housing is a virtuous cycle in which rising prices and falling inventory actually stoke demand.  So when potential home buyers see that prices are starting to accelerate, or there is less inventory, they get more excited to buy.  A shocking concept we know – people chase price!


To be clear, a stabilization in the housing market is basically a consensus call at this point.  There is an alternative scenario from the simple linear recovery though, which is that the housing recovery could become parabolic.  As my colleague Josh Steiner wrote last week:


“Fundamentally, the data suggests that over the long run total housing starts have grown at a rate slightly above the growth rate in household formation. From 1959-2012 housing starts have averaged 1.468 million per year while over that same time period new household formation has averaged 1.287 million per year. Recently, household formation rates have picked up sharply.


From 3Q11 through 2Q12, household formation growth has risen at an annualized rate of 1.739 million, yet housing starts have been running at an annualized rate of 0.673 million during that same time period. Our parabolic extrapolation from above projects that housing starts would rise to an annualized level of 1.318 million and 1.886 million by year-end 2013 and 2014, respectively, whereas a linear extrapolation gets to 1.012 million and 1.180 million by year-end 2013 and 2014.


While the parabolic extrapolation may seem high, it exceeds recent household formation rates by just 147k units. This compares with the 53 year trend (1959-2012) of starts exceeding HH formation by an average of 181k.”


Simply put, the combination of rising prices, tight inventories, and increasing household formation may lead to an accelerating recovering in housing.  This would certainly be beacon of positivity in sordid economic recovery.


Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Natural Gas, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1714-1738, $109.21-111.48, $3.73-3.94, $80.53-81.36, $1.26-1.28, 1.54-1.68%, and 1364-1399, respectively.


Happy Thanksgiving to you and your families.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Parabolic Recoveries - Chart of the Day


Parabolic Recoveries - Virtual Portfolio


The Macau Metro Monitor, November 23, 2012




“Nearly half of the 11 slot parlours” operating in Macau will have to either close or relocate under a new bylaw regulating the location of those gaming venues" said Secretary Tam.  Tam stressed the new bylaw “further tightens the parlour regulation, it does not relax it, unlike some opinions have reckoned.”  On Wednesday, the Executive Council, the government’s top advisory body, issued a press release saying that a new set of rules on the location of slot machine parlours was finally ready.  The new bylaw stipulates that slot parlours cannot operate in residential areas.  The government must adopt  “adequate measures” to solve the issue of slot parlours located in residential areas, within one year after the bylaw takes effect, said the press release.


The new rules state that slot parlours are to be located only inside five-star hotels, in non-residential buildings located within a 500-metre range of a casino or within a resort “not integrated in a densely populated area”.



A joint venture between the Macau-based subsidiaries of Paul Y. Engineering Group Ltd and Yau Lee Holdings Ltd has been awarded the construction contract for the Studio City casino resort, a project majority owned by MPEL.  The contract sum for the project is approximately HK$10 billion (US$1.29 billion).  The completion date is expected to be in the middle of 2015.

Earlier this week, Paul Y. Engineering Group announced it was planning to raise HK$3.2 billion for the construction of a boutique casino hotel in Cotai, just next to the One Oasis residential project.  In the stock filing, it was not disclosed under which casino operator’s gaming licence the casino would operate, but a 2009 prospectus unveiled by Macau Daily Times names MPEL as the project’s partner.



Visitor arrivals totalled 2,347,646 in October 2012, down by 1.2% YoY.  In October 2012, the average length of stay of visitors stood at 1.0 day, up by 0.1 YoY.  Visitors from Mainland China decreased by 1.4% YoY to 1,445,420, with those travelling to Macao under the Individual Visit Scheme rising by
6.0% to 612,073.





Singapore's inflation rate eased to 4% in October from 4.7% in September.  The core inflation rate, which excludes transport and accommodation costs, fell to 2.2% in October from 2.4% in September.  The Monetary Authority of Singapore (MAS) said, "The persistent tightness in the labor market will support slightly stronger wage increases in 2013, which will continue to be passed through to consumer prices."

On the whole, MAS anticipates core inflation to be "broadly stable" and averaging around 2.5% this year, and 2% to 3% in 2013.  For the full year, CPI-all items inflation will remain "elevated" in Q4 2012 and Q1 2013, reflecting significant contributions from housing and accommodation costs.  CPI-All items inflation is likely to come in slightly above 4.5% in 2012 and ease to 3.5% to 4.5% in 2013.

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