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Italy’s Uncertain Footing

With no one party receiving a true majority across both houses of parliament in yesterday’s vote, it appears we’re set for either another round of elections or the initial days to formulate a grand coalition. We give the latter significantly less probability because we believe the strong voting results for the Berlusconi and Grillo parties across the upper and lower houses will create more polar factions (particular on the fiscal agenda) and therefore less opportunity for fruitful coalition building, that is to say a coalition not hampered by political gridlock. Remember the party platform of Grillo’s Five Star Movement has been one to not form a coalition.  


Below we refresh a number of charts to highlight the broader, challenged economic fundamentals of the country. Our call here is that the uncertainty around the election (another vote or a grand coalition), especially with the likely prospect of Berlusconi renewing his political powerbroker license, should add further downside pressures to many of the charts. 


Given that coalition talks are officially not supposed to take place until the presidents of the lower and upper houses have been elected on March 15, there’s a good runway of political uncertainty ahead that we expect should lead to more downside across Italian capital markets and put pressure on the EUR/USD.



Growth Slowing - As the data from Reinhart and Rogoff shows, when a country’s sovereign debt load exceeds 90% (of GDP) growth is dramatically impaired. We think the market will continue to punish Italy at 120% via higher servicing costs. Interestingly Italian yields have ticked lower since ECB President Mario Draghi called to buy “unlimited” sovereign debt via the OMT program on 9/6/12.  We think the political uncertainty should boost yields and may materially challenge investors’ perception that Europe is 'healed'.


Italy’s Uncertain Footing - 11. italy gdp


Hockey Stick Risky Profile – Yields and CDS have popped since the election results became more clear yesterday (2/25). The 10YR yield is at 4.90% and the spread over German Bunds is up 57bps since Friday (2/22).


Italy’s Uncertain Footing - 11. yields


Italy’s Uncertain Footing - 11. cds


Underperforming Growth - A major leading indicator for growth is derived from PMI surveys. As the two charts below indicate, Services PMIs are well under the Eurozone averages and along with Manufacturing have been under the 50 line that divides expansion (above) and contraction (below) for 13 and 18 straight months, respectively. 


Italy’s Uncertain Footing - 11. services pmi


Italy’s Uncertain Footing - 11. manu pmi


Labor Cost Inefficiencies - A major factor behind Italy’s slower growth profile is stagnation in its productivity, witnessed by higher unit labor casts, while wages, despite declines, have yet to turn negative.


Italy’s Uncertain Footing - 11. unit labor cost


Industrial Production – Slowing and underperforming continued.  In a European Commission paper reviewing Italy, the report noted that stagnation in production is the key factor behind Italy’s loss of cost competitiveness since the euro adoption.


Italy’s Uncertain Footing - 11. IP


Unemployment Hooking - Another grave dynamic is the underemployment across Italian youths at 37%. While short of the 52% for Spanish youth, combine “a lost generation” with Italy’s demographic headwinds of an aging population (near oldest in Europe) and you have a cocktail that puts great pressure on social services, and the debt and deficit loads in the years ahead.


Italy’s Uncertain Footing - 11. unemployment rate


Smashed Piggy Banks - The Italian household savings rate moved from a high of 17.8% in mid 2002 down to 11.6% as of Q3 2011. The chart shows that Italians leveraged their savings in the upturn and in the downturn. The tapping of savings in the last three years demonstrates to pay off debt and the resilience of the Italian consumer to maintain previous spending levels.


Italy’s Uncertain Footing - 11. savings rate


Confidence Down  - Italian economic sentiment has trended lower since mid-2011.


Italy’s Uncertain Footing - 11. economic sentiment


Retail Sales Down  - decidedly down.


Italy’s Uncertain Footing - 11. retail sales


New Car Registrations  Down - Yet another metric we follow. Here again, no surprise, underperformance vs the EU average.


Italy’s Uncertain Footing - 11. car registrations


Square Stagflation - While we expect inflation to moderate in 2013, but currently at +2.4% Y/Y, sticky stagflation continues to be a tax on a citizenry already feeling crushed by austerity.


Italy’s Uncertain Footing - 11. cpi


Matthew Hedrick

Senior Analyst

Quick thoughts on BUD and STZ into BUD EPS

Anheuser-Busch InBev is set to report Q4 earnings tomorrow morning – we don’t expect much in terms of surprises in the quarterly result.  Our estimate is broadly consistent with consensus – slightly lower on revenues (consensus is $10.26 billion), recognizing that the constant currency organic revenue comp in the lapping period is the most difficult comparison of ’11 (+5.7%).  We are close to consensus with our EBITDA estimate of $4.37 billion (consensus of $4.39 billion).

We don’t expect any material commentary on the proposed transactions between Anheuser-Busch InBev and Grupo Modelo.  Our view is that the parties, including the Department of Justice, continue to negotiate, and that the outcome will be consistent with our belief that the new transaction satisfies the concerns expressed by the DOJ when it filed suit to block the transaction.


Having said that, we recognize that the risk/reward profile on one of the parties to the transaction, STZ, is asymmetric.  We believe that STZ, with approval of the beer transaction, can continue to rerate toward $50/share.  However, there is a good bit of air underneath the name and even a 5% probability of further illogic on the part of the DOJ (downside to $30/share) makes us hesitant to be aggressive on STZ at this point.


ABI, on the other hand, still has significant free cash flow support (approximately $6 per share on 2012 numbers) and can be defended on weakness – which is exactly what we would do should any material weakness develop in the wake of the company’s Q4 earnings release.


Call with questions,




Robert Campagnino
Managing Director


Matt Hedrick

Senior Analyst

Bullish TREND: SP500 Levels, Refreshed

Takeaway: The bullish intermediate-term TREND we have been amped up on for Asian and US Equities since late-November is still very much intact.



After the biggest 1-day move in US Equity Volatility since August of 2011 (+39% intraday), the VIX is coming in fast today. If it continues to come in (and holds below my TREND line of 17.18) we may have just witnessed another government sponsored head-fake (#Italy).


Lower-highs in long-term volatility make as much sense as lower-highs in Gold and Treasuries. It’s all the same thing to me. People are freaking-out about what we didn’t have from March to November of 2012 – global growth. I still think Strong Dollar Commodity Deflation stabilizes that.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1499
  2. Immediate-term TRADE support = 1479
  3. Intermediate-term TREND support = 1463


In other words, the bullish intermediate-term TREND we have been amped up on for Asian and US Equities since late-November is still very much intact. We are experiencing an immediate-term TRADE headwind however (1499 support is resistance until it is support again).


A close above 1499, puts the YTD highs (1530) back in play, probably as fast as yesterday’s lows were. Especially if the VIX breaks down hard in March (like it did after the late DEC government sponsored volatility scare – that time it was Congress).




Keith R. McCullough
Chief Executive Officer


Bullish TREND: SP500 Levels, Refreshed - SPX

Reviewing Italian Election Results

This note was originally published February 25, 2013 at 17:32 in Macro

Yesterday's results (which are still being tabulated) suggest a hung parliament in Italy, with Berlusconi taking the upper house and Bersani winning the lower house. Given that both houses have equal powers, the stalemate suggests that today’s results will force Italy’s President to call for an interim government and another round of voting.


The results show that Italians voted against the fiscal reforms under Monti. The Italian 10YR yield increased 12bps versus to 4.49% and the spread versus German bunds increased 14bps as the EUR/USD fell -0.89% to $1.3076 on the day.


Broadly, today’s results show that economic uncertainty breeds political uncertainty, a case we seen time and time again across the Eurozone. We think this power vacuum should put upward pressure on Italian sovereign and bank spreads, a drag on the country's already weak economic fundamentals.



While final votes are still being tabulated, the key take-aways of today’s results are:

  • Strong support for Peppe Grillo and his anti-austerity party (The Five Star Movement, M5S) and increased support for Silvio Berlusconi’s center-right People of Liberty Party (particularly in the upper house) took needed support from Pier Lugi Bersani and his center-left Democratic Party alliance to led to a mixed upper and lower house result.
  • Since Grillo’s party is not looking to form a coalition with anyone, his support is simply creating a wedge in coalition building

In the Lower House (630 seats) -

  • Bersani took majority control, gaining some 340 seats, on 29.2% of the vote, according to projections
  • Berlusconi got 28.7% and 121 seats
  • Grillo received around 111 seats on 26.1%
  • Monti took a mere 8.4%


In the Upper House (315 seats) -

  • Berlusconi may have "won" the Senate race with 113 seats, according to RAI forecasts by gaining the key swing regions of Sicily, Campania and Lombardy
  • Bersani – 105 seats
  • Grillo – 63 seats
  • Monti – 20 seats


Matthew Hedrick

Senior Analyst

Housing: Rapid Growth

Since #GrowthStabilizing began in late November of last year, housing has been one of the leading drivers of recovery in the US economy. Today’s housing data is indicative that the recovery is still on fire and has no signs of letting up anytime soon. New home sales rose 15.6% month-over-month in January to 437,000; December data was revised up from 369k to 378k making the comp more impressive. On a year-over-year basis, new home sales in January are up 28.9%, which is the fastest rate of growth in the last 12 months. Impressive by all means.


Housing: Rapid Growth - nhs 1


The inventory of new homes for sale was flat at 150k. When looking at inventory on a months supply basis, January stood at 4.1 months, down from 4.8 months in December and the lowest level of inventory since March, 2005. For perspective, months supply floated between 4-5 months from 1997-2005. We would expect to see inventory levels rise, as this reflects a strengthening market. We continue to believe that home prices are heading meaningfully higher in 2013. This morning's New Home Sales data, showing a rising sales rate and falling months supply of inventory, supports our thesis.


Housing: Rapid Growth - nhs 2


Housing: Rapid Growth - nhs 3


Housing: Rapid Growth - nhs 4


Housing: Rapid Growth - nhs 6

Proper Risk Management

Client Talking Points

Who Could Have Known?

Sometimes the market just likes to throw in a mid-day switch for good measure. In the case of yesterday, it looked like the S&P 500 was going to test YTD highs (1530) and instead, volatility cranked up and boom: the marker "tanked." We did some smart planning, like selling our short Yen (FXY) position and sold Utilities (XLU) on the high. No one could have predicted that the Italian election would have caused as much global chaos as it did yesterday. The Euro took a nosedive south and now our risk management signals are flashing bearish for the first time since a long time.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


"Yesterday's 1-day move (up) in the VIX was the biggest since AUG2011" -@KeithMcCullough


"A cynic is a man who, when he smells flowers, looks around for a coffin." -H.L. Mencken


U.S. home prices rose in December, and saw the largest year-over-year gain since 2006. The S&P/Case-Shiller 20-city composite posted a nonseasonally adjusted 0.2% increase in December, following a 0.1% decline in November.

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