ECB on Hold; EUR Pressured; Slovenia Scares

Takeaway: We expect no change on Thursday from the ECB in interest rates as the data is “accommodative”. EUR/USD continued downside support alongside Italian election uncertainty, Cyprus, and new Slovenian scares. 


Real-time Positions in Europe: Short SPDR Euro Stoxx50 (FEZ)

ECB on Hold

On Thursday the ECB’s governing council convenes. We expect no change to the main interest rates. Our rate position is largely in agreement with consensus -- 46 of 48 economists polled by Bloomberg expect no change. We don’t rule out a rate cut in 2013, but aren’t calling for one tomorrow.


This position is grounded in recent data that is supportive of an “accommodative” hands off approach from Draghi – CPI came down over recent months and is resting at 1.7% Y/Y in MAR, below the ECB’s 2.0% targeted level. PMIs across the region continue to look dim, but across the core were revised up in MAR versus initial estimates.  While the Eurozone unemployment rate has ticked up to all-time highs of 12%, Draghi will offload this concern to the labor market reforms needed at the country level.  Also, the aggregate unemployment rate has historically been higher than in the U.S. and is tame compared to peripheral figures. 


While we think that investor sentiment is lower on the region currently due to concerns over Italy, Cyprus, and now possibly Slovenia (more below) – as compared to the optimism in the back half of 2012 following the announcement of Draghi’s OMT –– we expect Draghi to keep his policy powder stowed on Thursday until there is a more meaningful flair-up in risk or greater change to the underlying data that the bank tracks. We believe the bank is also waiting and watching to see the outcome of the political scene in Italy.


ECB on Hold; EUR Pressured; Slovenia Scares - vv. interest rates


EUR/USD Levels

Broadly we think the uncertainty around the next Italian government, the tail of Cyprus, recent scares over Slovenia (more below), and the ECB interest rate stance on hold will put downside pressure on the EUR/USD. We’re no closer since the Italian election of late February in determining if a coalition can be formed as both Pier Luigi Bersani’s center-left and Beppe Grillo’s Five Star Movement refuse to accept a coalition.   


Our critical quantitative lines on the EUR/USD are outline in the chart below. We do not see any meaningful support until around $1.22.


ECB on Hold; EUR Pressured; Slovenia Scares - vv. eur usd new


The most recent weekly CFTC data (from 3/26) shows a continued net bearish positioning in the EUR/USD.


ECB on Hold; EUR Pressured; Slovenia Scares - vv. CFTC



Slovenia Joins the Mixer

Interestingly, the financial risks associated with Slovenia have received more attention this week. Take a look at the charts of the 8YR Yield on Slovenian debt, which began its hockey stick move on 3/15 to top out near 7% on 3/27, and 5yr CDS that jumped up since 3/22, but still remains below associated Greek freak-out levels last summer.


ECB on Hold; EUR Pressured; Slovenia Scares - vv. slovenia


If we have a Slovenian moment it will be very similar to Cyprus – a blip on the radar in terms of shaking the Eurozone apart – and we would not expect a similar deposit levy to be issued. Slovenia is much too close to the heart of Europe, it has different banking issues than Cyprus, and we believe the levy in Cyprus was largely a misstep on the part of the Eurocrats anyways.


To provide a bit of context on Slovenia, the country has been in the cross hairs (so to say) regarding its fiscal state for over a year, with the government at times saying either that it doesn’t need a bailout, or if it did, would not ask for external help.  But who can you trust these days?  Certainly not the Slovenian government.


The government actually fell in FEB 2013 over then PM Janex Jansa receiving slush funds, and on 3/14 was replaced by a coalition government led by the center left. 


It’s a rather small country (population of 2MM), with little great industry to speak of versus say its near neighbors the Austrians, Hungarians, or Slovaks.  Its banks, much like most countries in the region, are stuck with a bunch of bad loans (many construction related), with estimates to the tune of €7 Billion.


Here are a few economic facts:

  • GDP ~ €35 Bill (or 0.3% of Eurozone) vs Cyprus of €20B
  • GDP was down -2.3% in 2012
  • Debt as a % of GDP = 53.2% (as of 2012)
  • Deficit as % of GDP = -6.4% (as of 2011) vs -5.7 in 2010
  • CPI = 2% Y/Y
  • Industrial Production -1.8% (trending lower for last 15M)
  • Unemployment Rate at 13.6% JAN

We’ll continue to monitor and dig in on Slovenia as the market turns. In any case, our bottom line is that should there be a need for a bailout, the Eurocrats will again jump at the opportunity to throw good money at bad and sweep Slovenia, like Cyprus, under the rug. 


Matthew Hedrick
Senior Analyst


USD: Crushing Commodities

The US dollar has been on a tear lately, posting gains for 7 out of the last 8 weeks. The #StrongDollar has in turn driven down commodity prices considerably since the beginning of February, which has helped increase consumption and thus growth. The CRB Commodity Index, which measures 19 different commodities, is down -0.95% since January 3rd of this year while the US dollar has appreciated +2.89% in the same time period.


USD: Crushing Commodities - CRBcommodities

Holding The Line In Europe

Europe may have a slew of problems on its hands right now but one noteworthy development that's been a positive for European equity bulls is that both Germany's DAX index and the UK's FTSE 100 index have held their TRADE and TREND lines of support since the beginning of April. The DAX's TRADE and TREND lines of support are 7861 and 7712, respectively, while the FTSE 100's TRADE and TREND lines are 6412 and 6262. Holding these levels shows that the market remains resilient in a time of crisis and that investors are determined to keep the bull hopes and dreams in play.


Holding The Line In Europe - FTSE


Holding The Line In Europe - DAX

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FNP: Debt Free FNP?

Takeaway: The potential sale of Lucky is a new and positive change. FNP would only be doing this if the price was a steep premium = a debt free FNP.


One of the usual ‘Juicy Coture is on the block’ stories just hit the tape regarding FNP, but the unusual component is that it had Lucky Brand attached to it as well.


While the market wants to see a sale of Juicy, we’d probably rather see FNP hang on to it for another quarter or two as we think that it’s in the process of bottoming, after which it will likely command a higher price.


Lucky, however, has better momentum right now around its product line than it has had in years as FNP parlays best practices learned from Kate over to Lucky (handbag line, brand extentions, etc..,).


Our best estimate is that Juicy will attract somewhere in the neighborhood of $200mm-$250mm (about 0.4x-0.5x sales). But for the company to let Lucky go at a point when momentum is building, we think that it would only do so at a premium valuation. 7x EBITDA implies around $150mm, which we think is the minimum Lucky would sell for.


We can speculate all day about the precise multiples that these two would sell for, but the truth is that only people involved in the transaction (which we’re not) should know. But what we can safely point out is that is that FNP ended the year with $325mm in net debt, and even if our estimates are high by 20%, the net proceeds of a deal would leave FNP debt free.


The company has already gone from being a debt-laden, low margin, low asset turning portfolio of bad brands to being one of the best growth stories in retail. Adding a debt-free element with the sale of its lowest-margin and lowest RNOA divisions only makes the story that much more attractive.


FNP has been our favorite name, and its still one of our top three. Despite the run, if you have a 12-month time horizon we'd resist the temptation to peel away today in the high teens. 


FNP: Debt Free FNP? - fnp1

Risk On: NYSE Margin Debt

Margin debt levels at the New York Stock Exchange (NYSE) show the amount of funds customers are borrowing from their brokerage (i.e. levering up). Historically, when NYSE margin debt gets to a +1.5 standard deviation or greater, market risk increases considerably. With current levels above +1.5 and the S&P 500 struggling to maintain its new all-time closing high of 1570, we could very well see a sell off in the US equity market sooner rather than later if history is anything to go by. 


Risk On: NYSE Margin Debt - NYSEmargindebt


Risk On: NYSE Margin Debt - NYSEdebt2

CAG, MKC, GIS – One of these Things is not like the Others

We don’t generally review quarters, but we do like to try and provide context for investors and we think it is important to put CAG into context with the two prior earnings releases in the packaged food sector.

GIS (March 20th) – Beat consensus by $0.07, raised full year guidance by $0.01 at the high and low end (1 quarter remaining).  Implied Q4 guidance is $0.51 per share vs. consensus of $0.59 ($0.08 below).  The company reduced advertising and media spending by 6% in its U.S. retail segment, offsetting some of the weakness on the gross margin line.


MKC (April 2) – Beat consensus by $0.01 (recall that the company had previously guided down this quarter), but lowered Q2 by $0.05 versus consensus.  The company maintained full-year guidance (had already guided down significantly back in the December quarter).


“While brand marketing support was $4 million lower in the first quarter of 2013, the company spent an additional $3 million for increased price promotions and paid allowances to gain distribution for new items” (emphasis added)


CAG (April 3) – Missed consensus by $0.01 ($0.55 versus $0.56), top line was weaker than expected due to a 3% decline in organic volume (troubling), but the company did see the benefit of 3% price/mix.  Importantly, the company increased marketing investment in its base business by 33% year over year (about $0.03 per share in EPS).  CAG maintained full year guidance of approximately $2.15 (one quarter remaining).


To be clear, we are in no way suggesting that EPS and revenue don’t matter.  However, quality matters as well and we view CAG’s EPS miss as a high quality problem in that it represents an investment in the business for the longer-term.


Bottom line for us is that this quarter doesn’t prompt any changes in either our estimates or our thinking on the name and we continue to see CAG as the best combination of value and “story” in the packaged food space.





Robert  Campagnino


Managing Director










Matt Hedrick


Senior Analyst

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