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Weekly European Monitor: Shorting Berlusconi’s Hair Plugs

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


Position in Europe: Short Italy (EWI)


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed down -0.3% week-over-week vs +3.2% in the week prior. Bottom performers:  Cyprus -6.9%; Poland -0.9%; Czech Republic -0.8%; Germany -0.8%; Slovakia -0.8%; Belgium -0.8%.  Top performers:  Portugal +4.6%; Italy +3.2%; Spain +2.7%; Romania +2.4%; Russia (MICEX) +2.2%; Denmark +2.0%; Turkey +1.8%; Switzerland +1.8%; Hungary +1.8%; Greece +1.6%.  [Other: France -0.6%; UK +0.5%].
  • FX:  The EUR/USD traded up +2.13% week-over-week.  W/W Divergences:RON/EUR +0.93%; PLN/EUR +0.02%; DKK/EUR -0.04%; NOK/EUR -0.76%; CHF/EUR -0.78%; CZK/EUR -0.83%; SEK/EUR -1.09%; ISK/EUR -1.19%; TRY/EUR -1.40%; GBP/EUR -1.71%; RUB/EUR -1.91%; HUF/EUR -1.92%.
  • Fixed Income:  The 10YR yield for sovereigns across the periphery were mixed week-on-week. Greece gained +49bps to 11.75% and Germany rose +5bps to 1.58%, while Spain fell the most at -17bps to 4.89%, Italy fell -13bps to 4.13%, and Portugal declined -12bps to 6.21%. France was basically flat and the UK lost -4bps to 2.08 on the week.  The major call-out is that Spanish 10YR fell below the 5% line this week, the first time since March 2012!

Weekly European Monitor: Shorting Berlusconi’s Hair Plugs - 111. yields



EUR/USD: Our TRADE range is $1.30 – 1.32

  • Our call - the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain and Italy in particular). We think that ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro”; the resolve of Eurocrats to maintain the Union at all costs; and the January ECB meeting in which there was unanimous decision to not changing rates will all keep a heavy line of support in the cross.
  • Yet we expect a long road towards a fiscal union as states will be reluctant to give their sovereignty up to an external entity, which should limit the cross’ upside.
  • A bullish data point comes from CFTC data for net non-commercial positions in the EUR/USD that shows an improving trend since May 2012 and even turned positive on 1/1/2013, the first time since August 2011.

Weekly European Monitor: Shorting Berlusconi’s Hair Plugs - 111.eurusd


Weekly European Monitor: Shorting Berlusconi’s Hair Plugs - 111. cftc



Shorting Berlusconi’s Hair Plugs:


It was a week of waiting and watching to see if the ECB would make any changes to its base rates. Consensus was firmly against a cut, which turned out to be correct. Draghi was particularly optimistic about the performance of Eurozone financial markets and conditions over the last six months in his press conference remarks, but had a much more somber tone in describing the economic outlook for the region.


We too wrestle with the mismatch between the broader economy and market conditions. This week we got Eurozone confidence figures that showed signs of flattening to slight improvement. Conversely, ECB loans to households and non-financial corporations have yet to arrest their decline/show a meaningful inflection, the unemployment rate for the Eurozone ticked up to 11.8%, and CPI and PPI remain elevated and situate the region in stagflation.  For more on the ECB decision see our note titled January ECB Presser: Draghi’s Optimism in No Real Recovery.


Weekly European Monitor: Shorting Berlusconi’s Hair Plugs - aaa. confidence


Weekly European Monitor: Shorting Berlusconi’s Hair Plugs - aaa. ecb loans


We added Italy via the etf EWI to our Real-time positions on the short side on 1/10/13 at $14.23.  We think there is a significant amount of pain on the short side of Italy with the eff immediate term TRADE overbought.  The high level of uncertainty on the future coalition government in Italy is one development we’re following closely. Former PM Berlusconi continues to be a wedge across parties and it’s unclear how the market will react should Monti not stand in a key position to assure adherence to austerity measures enacted under his watch.  For more on Italy please see our note titled Italy’s Uneven Footing.



The European Week Ahead:

Monday: Nov. Eurozone Industrial Production; Dec. Germany Wholesale Price Index (Jan. 14-18); Dec. UK RICS House Price Balance; Nov. Spain House Transactions; Nov. Italy Industrial Production; General Government Debt


Tuesday: Nov. Eurozone Trade Balance; 2012 Germany GDP, Budget; Dec. Germany CPI – Final; Dec. UK PPI Input, PPI Output, CPI, RPI; Nov. Germany ONS House Price; Nov. France Central Government Balance;  Dec. Spain CPI – Final;  Dec. Italy CPI - Final


Wednesday: Dec. Eurozone EU27 New Car Registrations, CPI; Germany Economy Minister Roesler Presents New Economic Outlook; Nov. Italy Trade Balance


Thursday: ECB Publishes Monthly Report; Jan. Eurozone Bloomberg Economic Survey; Nov. Eurozone Construction Output; Jan. Germany Bloomberg Economic Survey;  Jan. UK Bloomberg Economic Survey; Jan. France Bloomberg Economic Survey; Jan. Spain Bloomberg Economic Survey; Jan. Italy Bloomberg Economic Survey; Jan. Greece Bloomberg Economic Survey


Friday: Dec. UK Retail Sales; Nov. Italy Industrial Orders, Industrial Sales



Call Outs:


Basel Committee - Banks won a four-year delay to fully meet international liquidity requirements and will be able to pick from a longer list of assets, including stocks and mortgage debt, following a deal struck by regulatory chiefs meeting yesterday in Basel


France - French Budget Minister Jerome Cahuzac said on Sunday that the Hollande government is not planning any tax increases for the next few years in an effort to offer stability and visibility to both individuals and companies. The highly controversial 75% tax on people making more than €1M a year was recently rejected by the French Constitutional Court. However, the government is preparing a new bill to maintain the key components of the tax hike.


Cyprus - Moody’s downgrades Cyprus 3 notches to Caa3 from B3.


Ireland - S&P said on Friday that Ireland is expected to retain its investment grade credit rating from the agency in 2013, despite its negative outlook.


ESM - held its first debt auction and sold €1.927B of 3M T-bills, average yield (0.0324%), bid to cover 3.2x.


ESM Investment - Japanese Finance Minister Taro Aso said that his country will buy bonds issued by the ESM, along with euro-denominated sovereign debt.


Eurogroup – Reuters, citing officials, reported that Dutch Finance Minister Jeroen Dijsselbloem is likely to be named the next chairman of Eurozone finance ministers (succeeding Luxembourg's Prime Minister Jean-Claude Juncker), when it is set decide on 21-Jan.  There’s speculation that German Finance Minister Schaeuble wouldn’t get the job over concerns that he may have alienated too many colleagues in southern Europe.


Italy - Bank of Italy data noted that Italian banks held a total of €271.8B from the ECB at the end of December, down from €273.3B at the end of November.


Spain - the Spanish Treasury said that its gross bond issuance target for 2013 was €121.3B, a 7.6% increase from total 2012 debt sales.


Cyprus - the German newspaper Handelsblatt, citing sources close to the negotiations, reported on Wednesday that Cyprus can only expect a bailout in early March after its presidential election next month. The paper said that Cyprus holds presidential elections on 17-Feb and 24-Feb, and Eurozone finance ministers want to wait to work with the successor to outgoing communist President Dimitris Christofias. It noted that Christofias, who is not seeking reelection, has rejected the sale of state companies that would generate the privatization revenues needed for reform. The article also discussed some of the potential backlash in the German Bundestag when it comes to approving a rescue for Cyprus, highlighting the increasingly hard-line stance by the SPD on the issue of tax evasion.



Data Dump:


Eurozone Retail Sales -2.6% NOV Y/Y vs -3.2% OCT

Eurozone Unemployment Rate 11.8% NOV vs 11.7% OCT

Eurozone Sentix Investor Confidence -7.0% JAN Y/Y vs -16.8% DEC

Eurozone PPI 2.1% NOV Y/Y vs 2.6% OCT


Eurozone Consumer Confidence -26.5 DEC Final vs initial -26.6

Eurozone Business Climate Indicator -1.12 DEC vs -1.17 NOV

Eurozone Economic Confidence 87.0 DEC vs 85.7 NOV

Eurozone Industrial Confidence -14.4 DEC vs -15.0 NOV

Eurozone Services Confidence -9.8 DEC vs -11.9 NOV


Germany Factory Orders -1.0% NOV Y/Y vs -2.5% OCT


Weekly European Monitor: Shorting Berlusconi’s Hair Plugs - 111  germany factory orders


Germany Imports -3.7% NOV M/M vs 2.9% OCT

Germany Exports -3.4% NOV M/M vs 0.2% OCT

Germany Trade Balance 17.0B EUR NOV vs 15.7B EUR OCT

Germany Industrial Production -2.9% NOV Y/Y vs -3.0% OCT


France Bank of France Business Sentiment 95 DEC vs 91 NOV

France CPI 1.5% DEC Y/Y vs 1.6% NOV


France Industrial Production -3.6% NOV Y/Y vs -3.4% OCT

France Manufacturing Production -4.6% NOV Y/Y vs -3.7% OCT


UK Halifax House Prices -0.3% DEC Y/Y vs -1.3% NOV

UK Car Registration 3.7% DEC Y/Y vs 11.3% NOV

UK Industrial Production -2.4% NOV Y/Y vs -3.0% OCT

UK Manufacturing Production -2.1% NOV Y/Y vs -2.0% OCT


Italy Unemployment Rate 11.1% NOV vs 11.1% OCT (youth unemployment 37.1%)

Italy Deficit to GDP (YTD) 3.7% in Q3 vs 4.7% in Q2


Spain Industrial Output -7.3% NOV Y/Y vs 0.9% OCT


Portugal Consumer Confidence -59.8 DEC vs -59.0 NOV

Portugal Economic Climate Indicator -4.4 DEC vs -4.3 NOV

Portugal Industrial Sales -5.9% NOV Y/Y vs 0.4% OCT

Portugal Construction Works Index 53.6 NOV vs 55.2 OCT

Portugal CPI 2.1% DEC Y/Y vs 1.9% NOV


Norway Credit Indicator Growth 7.1% NOV Y/Y vs 6.9% OCT

Norway Industrial Production -3.5% NOV Y/Y vs 2.5% OCT

Norway Industrial Production Manufacturing 2.4% NOV Y/Y vs 2.7% OCT

Norway CPI 1.4% DEC Y/Y vs 1.1% NOV


Sweden CPI -0.1% DEC Y/Y vs -0.1% NOV

Sweden Industrial Production -4.3% NOV Y/Y vs -4.3% OCT


Netherlands CPI 3.4% DEC Y/Y vs 3.2% NOV

Netherlands Industrial Production 0.7% NOV Y/Y vs -1.7% OCT

Finland Industrial Production -1.9% NOV Y/Y vs -0.3% OCT


Switzerland CPI -0.3% DEC Y/Y vs -0.1% NOV

Switzerland Unemployment Rate 3.3% DEC vs 3.1% NOV

Ireland Industrial Production -6.2% NOV Y/Y vs -16.6% OCT


Austria Wholesale Price Index 2.7% DEC Y/Y vs 2.8% NOV

Belgium Unemployment Rate 7.4% NOV vs 7.4% OCT


Greece Industrial Production -2.9% NOV Y/Y vs 2.0% OCT

Greece Unemployment Rate 26.8% OCT Y/Y vs 26.2% September

Greece CPI 0.3% DEC Y/Y vs 0.4% NOV


Russia Consumer Confidence -8 in Q4 vs -6 in Q3

Russia CPI 6.6% DEC Y/Y Final [unch vs initial]


Czech Republic CPI 2.4% DEC Y/Y vs 2.7% NOV

Czech Republic Unemployment Rate 9.4% DEC vs 8.7% NOV

Czech Republic Retail Sales -1.8% NOV Y/Y vs 2.2% OCT


Romania Q3 GDP Final -0.5% Y/Y [vs initial -0.6%]   [-0.4% Q/Q [vs initial -0.5%]

Romania Retail Sales 3.0% NOV Y/Y vs 0.7% OCT

Romania Industrial Sales 4.6% NOV Y/Y vs 9.4% OCT

Romania CPI 5.0% DEC Y/Y vs 4.6% NOV


Estonia CPI 3.5% DEC Y/Y vs 3.6% NOV

Estonia Exports 9% NOV Y/Y vs 10% OCT

Estonia Imports 3% NOV Y/Y vs 21% OCT


Hungary Producer Prices -2.9% NOV Y/Y vs 0.2% OCT

Hungary Industrial Production -6.9% NOV Y/Y vs -3.8% OCT


Slovenia Industrial Production -3.6% NOV Y/Y vs 2.0% OCT

Slovakia Industrial Production 5.2% NOV Y/Y vs 8.1% OCT

Slovakia Avg Monthly Wage 0.1% NOV Y/Y vs 1.3% OCT


Turkey Industrial Production NSA 11.3% NOV Y/Y vs -5.7% OCT



Interest Rate Decisions:


(1/7) Romania Interest Rate UNCH at 5.25%

(1/9) Poland Base Interest Rate CUT 25bps to 4.00%

(1/10) BOE Main Interest Rate UNCH at 0.50% and QE unchanged at £375B

(1/10) ECB Main Interest Rate UNCH at 0.75%

(1/10) ECB Deposit Facility Rate UNCH at 0.00%


Matthew Hedrick

Senior Analyst

FDX, UPS: Independent Contractor Expert Call Summary

FDX, UPS: Independent Contractor Expert Call Summary




For Replay, CLICK HERE

For Materials: CLICK HERE


Our Take on FedEx Ground & ICs


  • Reasonably Robust: Our expert call with Rich Reibstein largely confirmed that FedEx Ground’s multi-route, multi-employee independent contractor (IC) model is more robust and refined than millions of other IC arrangements.  While it would be difficult to structure IC arrangements perfectly under current law, FedEx has been proactive and restructured ahead of most legislation.
  • Already Restructured:  The FedEx Ground IC structure remains under legal attack and it is a key risk for the firm.  However, FedEx has long recognized the advantages and exposures of relying on IC.  The company has already spent years restructuring its lCs to better conform with the various IC definitions.  Spending and incentives associated with this restructuring depress FedEx Ground’s margins in the mid-00’s.
  • Expect More Legislation:  As State and (eventually) Federal legislation narrow the opportunities for IC labor structures, it is reasonable to expect FedEx to have ongoing legal expenses (including court losses) associated with independent contracting.  In addition, the plaintiffs’ bar appears to smell money in IC lawsuits and is actively seeking them.  However, the FedEx Ground IC model, including the cost and flexibility advantages that it provides, does not appear to be in jeopardy. 
  • Not Unlike Small Franchises:  Franchise arrangements, where a company like McDonalds exerts significant control over the franchisees, are not entirely distinct from multi-route, multi-employee FedEx Ground ICs.  Some might argue that FedEx forced the aggregation of single route ICs into larger contractors and such issues may result in legal challenges.  To us, the form of employment seems likely to be more relevant than the motivation behind it.
  • Other Industries Impacted:  We contacted Richard to better understand the sustainability of FedEx Ground’s labor advantage over UPS.  However, it is clear that other transport and construction industries could be impacted with the growing tide of IC legislation and plaintiff interest.  With approximately 10 million independent contractors in the United States, many other sectors of the economy could be impacted by fines and 30%-40% labor cost increase that separates ICs from full-time employees.  Construction, Transportation and Staffing appear most exposed.  Tighter IC regulation (and tighter labor regulation in general) tends to benefit Staffing companies.


Summary of Expert Call with Richard Reibstein


Independent Contractor Background

  • Independent contractors cost companies on average ~35% less relative to regular workers due in large part to the following major factors:
    • Payroll taxes
    • Unemployment contributions
    • Benefits such as healthcare and 401k
    • Workers’ compensation
    • There has been a huge increase in the number of independent contractors in the past 20 years and we now have over 10 million in the US.
    • In 2007 the US realized it had a tax gap and the government began looking at companies that might be attempting to circumvent the independent contractor laws.
    • Some states put laws in place to crack down on independent contracting.  Massachusetts was the first and others have followed their lead.
    • There have been a number of bills proposed at the national level in the past 4 years dealing with both independent contractor tax and labor issues, but there has not been bipartisan support for them.  I think as we go forward these bills will pass because the tax gap is becoming an increasingly pressing issue.

The FedEx Ground Model

  • FedEx Ground and FedEx Home Delivery utilize independent contractors to make their deliveries because RPS was built on an independent contractor model.
  • At the point when FedEx Ground purchased RPS they were operating much more in compliance with the contractor laws than they currently are.
  • The key difference in the worker-management relationship in an independent contractor model is that management is not supposed to instruct the worker on how to do their job.  They can tell them what to do, but now how to do it. 
  • FedEx has decided to restructure their relationship with Ground drivers.  Drivers are now required to have more than one route, which essentially means that FedEx is attempting to control their independent contractors.  
  • Although FedEx is committed to this direction the states are creating their own laws which have been posing problems for FedEx.
  • For example, FedEx paid $30 million in California because drivers were determined to be misclassified.  A large portion of this payment was legal fees and that is just one example of the hidden costs associated with an independent contractor model for FedEx going forward.
  • Few companies are looking at the writing on the wall because they cannot change their structure easily or inexpensively.  

What to Expect in the Next Four Years

  • More and more states will adopt laws cracking down on companies using independent contractors.  There might be a grassroots movement to start alerting misclassified independent contractors that they should be eligible for benefits.
  • The Federal government may increase the enforcement level because they were recently given a bigger budget by President Obama.  The Secretary of Labor, Hilda Solis, has focused on those industries where misclassification is most prevalent.
  • It is likely that states will begin sharing information in an attempt to coordinate efforts against misclassified independent contractors.
  • Recent federal laws have proposed to eliminate the safe harbor clause because it states that if a company has misclassified a group of workers on accident they can enjoy a safe harbor and avoid penalty.  FedEx has been able to defeat the IRS with this safe harbor clause.




Today we bought Brinker International (EAT) at $32.78 a share at 3:13 PM EDT in our Real-Time Alerts. Hedgeye Restaurants Sector Head Howard Penney got on our Morning Call this morning and was excited about Chilis' new initiatives. Buying consumption on red - we'll sell it on green when the time is right.


TRADE OF THE DAY: EAT - image001

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The Economic Data calendar for the week of the 14th of January through the 18th 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.



When In Drought

The drought that has plagued Midwestern America and the rest of the country is far from over. New reports show that corn, wheat and other commodities are low in supply, which accounted for today’s pop in the futures market. Simply put: the Midwest needs snow and lots of it. Several feet will be necessary to equate to the amount of rainwater that will make a material difference. Average snow depth across the Midwest for the first 11 days of January was 0.3 inches and that was covering only about 10.4% of the area. Ouch.


When In Drought - Drought 1.8.13


When In Drought - image001

GES: Sentiment Should Be Weaker

Takeaway: $GES is an admittedly unloved stock, but it should be loved less. Some argue it's cheap, but the real EPS power makes it look expensive.

Guess? Is one of the more interesting names to us heading into ICR.  It will undoubtedly be one of those companies where 50 analysts will be crowded around the CEO at the break-out session fighting to glean every last bit of information. But we have no reason to believe that the information will be positive relative to expectations.


To put this into perspective, the stock is up 14% since the trough before the latest quarter and is sitting just 4% (or $1) away from its TAIL line of resistance). On that last print, which was very sloppy to say the least, it was clear that management really has no clue as to why its business is weak. While placing blame on a weak consumer might be accurate, we can point to a host of other companies that are still growing even with a weak consumer.


Also, one notable difference at ICR this year is that GES is without a COO and a CFO – the first time in its history of attending this conference where that will be the case. So let me get this straight…the company just lost two of its best players (with the simultaneous and still mysterious resignation of Prince and Secor), and the remaining bench is left trying to bridge the gap between macro and a micro problems.


In looking at sentiment, one might think that these concerns are already baked into the stock. After all, sentiment (as measured by our Sentiment Monitor) is sitting near a historical low of 20 on a scale of 100. (i.e. this says that sentiment is bearish, which when exaggerated is a contrarian indicator for the stock).

GES: Sentiment Should Be Weaker - ges sentiment


But we don’t think so, and we think it comes down to earnings.

1)      We need to assume that every business unit accelerates in order to hit the company’s 4Q guidance – which they issued at a time when they admittedly did not know what was driving their business down.

2)      We’re at $1.65 next year versus the consensus at $2.32. Yes, it looks cheap at 10.8x consensus estimates. But it’s at 15.2x our number.

3)      Keep the current multiple steady on our estimate, and you get a $17.75 stock – that’s 30% downside from where it is today.  


Keep in mind that GES was one of the companies that came out an announced a special dividend for the 2012 calendar year -- $1.20 per share, or $110mm. This was one of the more self-serving moves we’ve seen, as the co-founders own 30% of the stock and drew better than $55mm in dividends for the year. That’d be fine as it pays other shareholders as well, but the reality is that this company is likely to generate free cash flow this year of only $125mm.


Even though the company is not levered, it hardly seems prudent to pay up for a special dividend when you’re looking at an economically cyclical business that depends on hitting fashion trends and the company just lost leadership by way of departures in the COO and CFO ranks. Shareholders probably liked the dividend, but we can’t quite stomach it from a risk management perspective heading into an uncertain 2013.


Of course, the disconnect would be that management does not view 2013 as a year where there is risk to earnings, while we do. Therein lies our comfort level with our short case.


The near term risk to the upside is that the company is one press release away from announcing an external management hire that gets people all excited. We don’t think that one person can immediately make a big difference here – especially given that whomever is brought on will need to prove (as Carlos Alberini did) that he or she can manage both the shareholder and family agendas simultaneously, which is tough to do. But we need to at least acknowledge the risk.




Note: As it relates to earnings, GES is currently sitting in a very bearish part of its SIGMA chart, with inventories and margins both working against the company.

GES: Sentiment Should Be Weaker - gessigma

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