Here's a chart that was just prepared by our Macro team here at Hedgeye. It shows quarterly GDP growth for the Eurozone both on a month-on-month and year-on-year basis. As you'll see, it's been a rough past 12 months.
Takeaway: Here's a reminder of just how much most Eurozone economies are struggling.
Sentiment has recently rolled on the EUR/USD, which is substantiated by CFTC data. The Hedgeye Macro team is calling for a strong USD, however we are nowhere near calling for parity in the cross as others on the Street are, which we think is a misguided thesis.
Below we show recent data that confirms a slow growth environment in the Eurozone laced with political risk that we expect to continue to play out in 2013 – we pare some of the positive charts we’re looking at versus negative ones to better express the landscape.
Our takeaway remains that while we expect to see flair-ups of sovereign and banking risk this year, with the largest threats from Italy and Spain, we believe the spotlight on Cyprus to be short lived, and continue to discount the risk. Here we see both Draghi at the ECB and the Eurocrats –in their belief in the European project – as stability mechanisms to prevent contagion and maintain the current 17-member union.
Specific to Cyprus, and despite the weak card and messaging that Eurocrats have sent to the markets and other Eurozone countries about deposit holders at risk to cover bailout packages, we do believe the Eurocrats when they say Cyprus is a unique case (despite the confusion around wording of the issue from Eurogroup head Dijsselbloem). In fact, we think the political backlash would be so harsh if similar measure were issued on larger economies with larger populations that the Eurocrats would be too frightened to even suggest it.
One area to highlight is the larger threat of political uncertainty playing out in Italy. While it’s still anyone’s guess just how the scene will unfold, we think it’s probable that Bersani will stumble to form a coalition (he continues to reject Berlusconi’s hand) and a technical government will have to be issued until new elections can be called. We view Italian (and Spanish) equities as relative laggards. Both are broken across the TRADE and TREND in our models.
Interestingly, Hans- Guenter Redeker, the head of global currency strategy at Morgan Stanley, recently said:
“Within 2 1/2 years or so, you could be very close to parity, so the risk of an undershoot is quite significant… The long-term implication is that monetary transition in Europe is not working, there’s no credit, no growth, and fiscal policy is still fragmented. So, therefore, you need to be fairly pessimistic for the outlook.”
While we don’t disagree with Redeker’s latter point, we do not agree with the former that the EUR/USD is heading to parity. First off, we think it is reckless forecasting so far out into the future, however we return to a long-held conclusion about incentives that we believe will prevent anything close to parity:
In the first of two charts below we present our key levels on the EUR/USD cross. In the second chart we show that net positions in the EUR/USD according to CFTC data have turned decided bearish since the last weekend of February (Italian elections), which reflects sentiment.
In the three charts below we take a look at confidence metrics across the Eurozone. We think market reactions are resetting to slower growth expectations across the region, particularly in the peripheral. Data across much of the region has not improved and governments continue to revise down their GDP targets as they reduce (or are excused on) deficit reduction targets, a perfect storm for increased bearish sentiment.
By the Charts: The Haves
Below are three charts to keep in mind on the bullish side of the coin:
By the Charts: The Have Nots
Below are five charts that reflect a constrained economic region, one that depends largely on the member states as its main trading partners for goods and services. This is represented by PMIs (mostly under 50 = contraction), GDP, Industrial Production and Retail Sales, and Car Registration. Finally we show ECB loans to Non-financial corporations and households that continue to show an anemic trend.
While it’s still anyone’s guess how the political scene will unfold in Italy, we think the political uncertainty will continue to pull the arrows in these charts lower.
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Takeaway: The Philippines earns its first-ever investment grade while Cyprus stays a mess. Take a look at this chart of the countries' market indices.
If you look at the three-year performance of The Philippines key stock market index over the past three years on the chart below, it makes sense that Fitch just gave the country its first-ever investment grade rating.
However, when you look at the Cyprus market over the same period, it tells a completely different story. The market knew what was happening there, too.
Takeaway: As the shift in American attitudes toward fast food has changed in recent years, Panera has emerged as one of the happy campers.
This note was originally published March 26, 2013 at 11:46 in Restaurants
As the shift in American attitudes towards "traditional" fast food has become more pronounced in recent years, Panera (PNRA) has emerged as one of the happy campers of the restaurant industry. Wounded bears, in the form of McDonald's (MCD), Wendy's (WEN), and others, pose a danger for PNRA.
In February, we wrote that Panera’s mix growth outlook was negative. Further evidence is emerging that competitors from quick-service restaurants (QSR) and Casual Dining are looking to challenge Panera’s position as the “healthy” option, a factor that could represent an added headwind to Panera comps going forward.
Panera Bread’s position as a healthy QSR option that is relatively free of competitors is gradually changing as casual dining chains offer lower price points and chains like Wendy’s upgrade their menus to include items that are cheaper than Panera’s core offerings but are marketed as healthy eating options. McDonald’s offering healthier menu alternatives, such as the McWrap, and investing in marketing the item aggressively, further underscores the industry-wide focus on healthier options that are sought by millennial consumers.
Happy Camper, Meet Wounded Bear(s)
We believe that the market has been shifting away from Wendy’s, McDonald’s, and other “traditional” QSR players for years. The impact of this shift in consumer preferences on McDonald’s has been masked, to a degree, by successful but transient products like frappes and smoothies. McDonald’s “millennial problem”, well described by Maureen Morrison at Ad Age is front-and-center for the company’s marketing strategy.
We are not optimistic that McDonald’s marketing shift will solve its issues but we do believe that Panera’s traffic trends are likely to be, on the margin, negatively impacted. Ultimately, when MCDonald’s hand is forced, the company will invest more meaningfully to change its brand’s perception among millenials who, increasingly, want fresh and organic food offered in a customizable manner.
McDonald’s and other traditional QSR players are scrambling to change with the times. Beverage initiatives at McDonald’s have worked as short-term panaceas but we contend that soft sales growth is symptomatic of a changing business environment as well as MCD's business becoming overly-complex. We believe that traditional QSR management teams see Panera’s brand positioning as an attractive path for the future. Given the deep pockets of this industry and the highly competitive nature of the companies involved, this will present a headwind to Panera’s same-restaurant sales going forward.
Takeaway: Here's our take on Under Armour's first quarter performance, and our outlook for the second half of the year.
This note was originally published March 26, 2013 at 20:18 in Retail
We think Unde rArmour is seeing a nice pop in its first quarter performance at retail, buoying our view that there will be a bifurcation this year in the company’s earnings trajectory. The Street is at $0.03, we’re at $0.09, and the company earned $0.14 last year. We think that UA set itself up for a beat in the first quarter, but then by the second half when it needs to rely on Footwear and International, we’ll see its EBIT growth rate slow down as it invests more SG&A to grow those newer businesses.
What gives us confidence in the first quarter? Simply put, for 10 quarters, UA’s wholesale sell-in to retail outstripped sell-thru by about 1,000bps. To get those numbers, we took total apparel sales, backed out International, e-commerce and company retail to get a true like-for-like US wholesale number. Then we compared to the weekly SportscanINFO sell-through data. That fueled an average Gross Margin decline of over 100bp over the past two years.
The good news is that in the first quarter to date, the retail sales data suggests that UA’s sell-through has been up near 30%. We should caution against simply jacking up UA’s top line in you model or taking up Gross Margins. Rather, this is the retailers clearing out inventory that has been building up for some time. But at a minimum, it should clear the way for the channel to accept Spring product at a clip sufficient enough for UA to deliver 20%+ growth in the upcoming quarter.
But Watch Out in the Second Half
We continue to think that UA will join the band of companies in the retail supply chain that is stepping up capital investment this year – both in capex and in SG&A -- but at the higher end. Growth in Footwear and International are both absolutely critical to UA’s aggregate top line. When that happens, we think that revenue and EBIT growth will diverge. If we’re wrong, then we think it is a matter of time until the top line slows, which would be even more damaging to UA’s multiple.
We still think that this is an exceptional brand, but simply think that it belongs to a company that needs to go through some growing pains before it could deliver upon the expectations currently embedded in the stock.
We think it’s more likely than not that earnings growth gets pushed out by a year sometime in the second half, and that investors should take advantage of this on or just after the first quarter print.
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