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Just Charts: #EuroBulls

This note was originally published December 03, 2013 at 15:21 in Macro

Editor's note: If a picture is worth 1,000 words, then you're looking at north of 20,000 words below. This is a complimentary, unlocked research commentary from Hedgeye analyst Matt Hedrick. If you are looking to turbocharge your research and portfolio click here.

 

Our Top Q413 Global Macro Theme remains #EuroBulls.

 

Just Charts: #EuroBulls  - bulls1 

 

The heart our #EuroBulls call is a bullish position on the GBP and EUR versus the USD and a bullish position on UK and German equities, built on a few central factors:

  • Central Bank Intervention: we expect Janet Yellen to remain the ueber dove on policy and push out any QE taper expectations to at least late in Q1 2014, which should burn the Greenback lower (etf UUP). 
  • BOE “Hawks”: we expect Mark Carney and the BOE to remain on hold with interest rates and the asset purchase target, built on improving UK fundamentals, which should encourage the British Pound higher (etf FXB).
  • Draghi’s Back Pocket: we were surprised (and off-sides) with the ECB’s decision to cut the interest rate 25bps on 11/7. The cross has since corrected and we like the set-up on the long side. Twisting an expression, we don’t think it pays to ‘Fight the ECB’: Draghi has balance sheet flexibility with LTRO repayments to unlock additional sovereign and banking bailouts, if needed (etf FXE).
  • Island Insulation: the UK was the first country to issue austerity in Europe -- we’re seeing the threw-put of that decision with fundamentals improving ahead of its European peers. We maintain a bullish bias on UK equities (etf EWU).
  • German Leadership: Chancellor Merkel is formalizing coalition talks with the SPD; alongside her Finance Minister Schaeuble we see strong continuity of policy vis-à-vis the EU with the new coalition. We’re seeing strong domestic economic health from Eurozone’s largest economy and we expect the country to benefit as the region recovers off a low base. We’re buyers of Germany’s stability (etf EWG).

Just Charts - Below we show the data we’re seeing that is supportive of our #EuroBulls call:

  • GDP Taking the Turn: before we highlight the economies of Germany and the UK, we’ll note that we’re seeing a broader improvement from the Eurozone region. In the next charts, the turn (to the positive) is underway!

Just Charts: #EuroBulls  - hed1

 

Just Charts: #EuroBulls  - zz. eurozone IP and REtail

  • Confidence Ramping: From economic to business and consumer, the improvement in confidence readings is hard to ignore.

Just Charts: #EuroBulls  - zzz. .eurozone business conf

  • Even Autos are getting a bounce: Any increase in big ticket items is a signal of confidence to us.

Just Charts: #EuroBulls  - zz. EU clunkers

  • PMIs Popping: the improvement in confidence is backed by stronger Services and Manufacturing PMIs.  Despite underperformance from France, we expect the Eurozone aggregate to cruise about the 50 line (expansionary), and the UK and Germany to outperform.

Just Charts: #EuroBulls  - zz. pmis

  • Risks Abates: an additional positive signal comes from tightening credit spreads, approaching levels last seen when Europe’s sovereign ‘crisis’ began.  While risk is not completely off the table, either on the sovereign or banking sides, we’re seeing compelling improvements. All European sovereign CDS are down on the month and, on average, European Financials have tightened by 46 bps or roughly 21% on the month. 

 Just Charts: #EuroBulls  - zzz. credit spreads

  • Deflating the Inflation: we view deflation of the inflation as a lower consumption tax that will boost real inflation adjusted growth. Clearly the ECB has failed to meet its mandate of CPI at or below 2%, however CPI at its current 0.9% is not a “threat” of deflation in our opinion.  Despite the ECB’s surprise cut to the interest rate on 11/7, we see no need for the central bank to cut further as fundamentals are showing improvements.       

Just Charts: #EuroBulls  - zz. Eurozone inflation

  • Draghi’s Back Pocket: Our new mantra is don’t ‘Fight the ECB’ because 1). Time and time again it has not paid to, and 2). Draghi has even more balance sheet flexibility now with LTRO repayments coming in. Don’t forget our central position has been that Eurocrats want to keep the Eurozone experiment alive – this includes at all costs, be it for additional sovereign and/or banking support. 

Just Charts: #EuroBulls  - zz. ECB and LTRO

  • Credit Thin: This chart remains a thorn in Draghi’s side. Getting credit to flow into the system to households and non-financial corporations has been a great challenge. We don’t expect the ECB to issue another round of LTRO, given its shortcomings in this respect, but we could foresee an alternative to the LTRO with more outlined lending requirements. 

 Just Charts: #EuroBulls  - zz. ecb loans to households

  • The TREND is Your Friend: our quantitative lines in the sand on the EUR/USD have not moved much in Q4. The currency crashed on Draghi’s unexpected rate cut on 11/7. It has since rebalanced and we like it on the long side as fundamentals improve and the EUR marginally wins out versus the USD in the #CurrencyWars (etf FXE). 

Just Charts: #EuroBulls  - zzz. eur usd levels

  • UK GDP: we expect outperformance versus most of its European peers, built largely on it choking down austerity first during the great recession.  The European Commission in its autumn report recently raised UK GDP expectations, to +1.3% in 2013 from +0.6% and to +2.2% in 2014 versus a previous estimate of +1.7%. We’re buyers of UK equities (etf EWU).

Just Charts: #EuroBulls  - zzz. uk gdp

  • UK CPI Eases: Inflation has moderated to 2.2%. We think this is an added benefit to consumers and expect a #StrongCurrency to increase purchasing power by deflating imported inflation.

Just Charts: #EuroBulls  - zz. uk cpi

  • UK Confidence Confirms the Data, or visa-versa: We see confidence rising alongside high frequency data: Manufacturing PMI for November was the best in in Europe (58.4 versus 56 in October). And Construction PMI shot up to 62.6 vs 59.3 in October.

Just Charts: #EuroBulls  - zz. uk confidence

  • UK Manufacturing and Retail Sales: confidence is a huge piece of the consumption puzzle; we see the trend in manufacturing and retail sales moving positively over the intermediate term. Household spending accounts for 62% of GDP in the UK. 

Just Charts: #EuroBulls  - zz. uk IP vs RETAIL

  • UK Housing May Ease: After taking off like a rocket ship for the balance of the year, the BOE announced on November 28th that it would curtail mortgage lending in its “funding for lending” scheme. 

 Just Charts: #EuroBulls  - zz. uk housing

  • GBP/USD: the cross is trading comfortably above over our intermediate term TREND level of support of $1.59 and long term TAIL line of $1.57 (etf FXB).

Just Charts: #EuroBulls  - zzz. gbp usd

  • Strong Germany: we continue to like the DAX, on a positive correlation to the EUR/USD. Fundamentals remain grounded with a low unemployment rate (6.9% vs 12.1% in the Eurozone), CPI at 1.6% Y/Y, expanding exports, strong PMIs and consumer and business confidence, and an inflection in factory orders to the upside (etf EWG). 

Just Charts: #EuroBulls  - zz. germany factory orders

 

Just Charts: #EuroBulls  - zz. germany ifo

 

Just Charts: #EuroBulls  - zz. germany zew

 

 

 

 

Matthew Hedrick

Associate

 

 

 


What's New Today in Retail (12/6)

Takeaway: More JCP drama. ESL seeing redemptions? JWN tops shopper poll. LeBron spanks NKE. GPS shines with a scant 2% comp. SHLD selling Land’s End.

EVENTS TO WATCH

 

Hedgeye Black Friday Consumer Survey: Focus on JCP.  We'll be conducting Round 2 of our JCP/Department Store consumer survey on Monday December 9th at 1pm.  If you are interested in our results, please email , or .

 

COMPANY NEWS

 

J.C. Penney Slides for Second Day as Bass Says Sold Stake

(http://www.bloomberg.com/news/2013-12-05/j-c-penney-slides-for-second-day-as-bass-says-sold-stake.html)

 

Takeaway: It's more than just a stock sale… 1) Bass, 2) SEC Inquiry, 3) Board backing Ullman 'until turnaround is done'. We delve into all of them. See our note "JCP: Fundamentals vs Newsflow vs The Stock"

 

ULTA - Q3 Earnings

 

What's New Today in Retail (12/6) - chart2 12 6

 

Takeaway: The amazing thing is that the quarter wasn't a complete disaster, and the SIGMA trajectory is better than bad. But when a hyper-momentum stock that everyone is afraid to short misses a quarter….watch out below. We turned bearish on this name in early Oct and shorted it at $124.56 while we continued our deep dive research on the name. One rule of thumb that we've picked up over the past 20 years is that the first miss is rarely the last.

 

SHLD - Sears Holdings Corporation Announces Filing Of Registration Statement For Spin-Off Of Lands' End Business

(http://searsholdings.mediaroom.com/index.php?s=16310&item=137257)

 

  • "Sears Holdings Corporation announced that, in connection with its previously announced consideration of a separation of its Lands' End business, Lands' End, Inc. filed today a registration statement on Form 10 with the Securities and Exchange Commission. Sears Holdings intends to spin off its Lands' End business through the pro rata distribution of all of the shares of common stock of Lands' End, Inc...The spin-off is subject to the approval of the Board of Directors of Sears Holdings and the satisfaction of certain other conditions."

 

Takeaway: Land's End is a good brand, but one that SHLD should never have acquired in the first place. It was targeted to spearhead the 'softer side of Sears' initiative. But needless to say, it failed.

 

SHLD - Lampert Sees Fund Investors Check Out

(http://online.wsj.com/news/articles/SB10001424052702304096104579240320972834520)

 

  • "Edward S. Lampert, struggling to stem heavy losses at Sears Holdings Corp., is facing an exodus of money from his hedge fund. Mr. Lampert's hedge fund is returning billions to clients of Goldman Sachs Group Inc. who had invested with ESL Investments Inc. in 2007, according to people with knowledge of the matter. Under that deal, Goldman's clients, such as corporate pension plans, put roughly $3.5 billion with Mr. Lampert, and they have asked for it back."
  • "The investors are receiving part of their funds in stock rather than all-cash, a redemption technique Mr. Lampert has used before."

 

Takeaway: This one speaks for itself. Let's hope Mr Lampert is not forced to sell any of his core positions -- SHLD, AN, and GPS.

 

NKE - LeBron Can't Let His Old Shoes Go

(http://online.wsj.com/news/articles/SB10001424052702303722104579240491917394108?mod=WSJ_business_LeadStoryRotator)

 

  • "In the 18 games played since the season opened, the four-time league MVP has worn the 11s for only two full games, spending most of his time on court wearing last year's LeBron X model."
  • "Mr. James's manager, Maverick Carter, said it isn't that the star doesn't like the latest edition of his shoes. Instead, he has been making tweaks to the shoe and expects to return to wearing the 11s full time in a matter of weeks, Mr. Carter said."

 

Takeaway: Nike doesn't get spanked by its athletes too often. This one is a rarity. That said, you can bet that the LeBron 11 will set new sales records.

 

GPS - Gap Inc. Reports November Sales

(http://www.gapinc.com/content/gapinc/html/media/pressrelease/2013/med_pr_GPS_Sales_November12513.html)

 

  • "Gap Inc. today reported that November 2013 net sales increased 8 percent compared with last year. Net sales for the four-week period ended November 30, 2013 were $1.63 billion compared with net sales of $1.52 billion for the four-week period ended November 24, 2012."
  • "Gap Inc.’s comparable sales for November 2013 were up 2 percent versus a 3 percent increase for November 2012. Due to the 53rd week in fiscal year 2012, comparable sales for November 2013 are compared to the four-week period ended December 1, 2012."

 

November Comparable Sales Results

  • Gap Global: positive 2 percent versus positive 4 percent last year
  • Banana Republic Global: negative 1 percent versus positive 3 percent last year
  • Old Navy Global: positive 3 percent versus positive 1 percent last year

 

Takeaway: Sadly, a mere 2% comp out of GPS actually puts it in the top quartile of retailers for the month of November.

 

JWN, KSS, DSW, DKS, M, JCP - Study: Nordstrom is consumers’ favorite fashion retailer

(http://www.chainstoreage.com/article/study-nordstrom-consumers%E2%80%99-favorite-fashion-retailer)

 

  • "Nordstrom is North America’s overall favorite fashion retailer for the second consecutive time, according to a new study of more than 6,800 consumers conducted by Market Force Information (Market Force), a provider of customer intelligence solutions."
  • "Kohl’s is the most visited for casual clothing, business attire and children’s clothing, while Dick’s Sporting Goods won out for sports apparel and DSW for footwear."
  • "When Market Force asked consumers to name their overall favorite retailer, Nordstrom ranked No. 1, earning significantly more votes than all of the other chains. Kohl’s ranked second, Macy’s was third, J.C. Penney was fourth and T.J.Maxx was fifth."

 

Takeaway: Not a shocker about JWN, with the exception of Bloomies, no one can really touch it.  What would be interesting to know is the difference between people that said JWN is their favorite place to shop vs those that said it is the place where they actually spend money (ie can afford to shop). No surprise that JCP remains in the toilet. At $100/square foot, it's running half the rate of its relevant peer group.

 

CFR - Cartier Exhibition Opens in Paris

(http://www.wwd.com/eye/lifestyle/cartier-exhibition-opens-in-paris-7297743?module=hp-accessories)

 

  • "Kate Middleton’s wedding tiara and Grace Kelly’s engagement ring are among the star pieces of an exhibition on Cartier opening in Paris today."
  • "Billed as the most extensive show to date dedicated to the French jeweler, famed for its panther-themed jewelry and Tank watches, 'Cartier — Style and History' is set to run at the Grand Palais until Feb. 16. It showcases more than 600 items ranging from fine jewelry and watches to decorative objects, many reflecting the influence of exotic locations like China and India. Most are drawn from Cartier’s extensive archives, but about 100 items are on loan from private collections."

 



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WYNN DRIVES MASS AND OTHER TAKEAWAYS FROM NOV MACAU DETAIL

As we expected, the detail behind what was already a very strong month, was even better.  As you know, Macau gross gaming revenues (GGR) grew 21% YoY in November to HK$29.3 billion.  What you may not know is that VIP hold percentage was approximately 34bps below the year to date average.  We estimate that GGR would have grown 30% YoY with normal hold % in November 2013 and 28% with equal hold % in both periods.  This truly was another outstanding month in Macau.

 

Two company themes we’ve been focused on clearly played out during November and should continue:  LVS is crushing it across the board and WYNN’s aggressive Mass push is beginning to pay off.  These are our favorite Macau names.

 

Here are our initial takeaways:

 

Market

  • Mass revenues increased 39%
  • VIP revenues climbed 15% despite the low hold percentage
  • Estimated VIP hold percentage was only 2.66%, below the normal of 3.00% and last year of 2.88%
  • VIP hold percentage was the lowest since March of 2011
  • Rolling Chip (junket) volume increased 24%, the highest growth rate in almost 2 years
  • Slots were the only disappointment, growing only 2% YoY

LVS

  • While 160bps better than October, market share was just in line with its 3 month average
  • However, VIP hold percentage was almost 60bps below normal – market share would’ve increased sequentially with normal hold
  • GGR outgrew the market (27% vs 21%) but assuming normal hold, LVS’s GGR would’ve grown 40% (vs the market at 30%)

WYNN

  • WYNN’s market share grew 30bps over its 3 month trailing average
  • Hold percentage was 10bps below normal but significantly below last November’s high hold
  • Wynn Macau grew its Mass share 130bps above its trailing average
  • Most importantly, Mass revenue grew over 53% YoY, the highest growth rate since June of 2011, and led the market
  • This was a great month for Wynn Macau

MPEL

  • MPEL was one of the few operators to hold above normal
  • VIP volume and Mass share both fell below recent trend
  • Total revenue growth was in-line with the market despite the relatively high hold
  • We think MPEL could be a share loser over the next year

MGM

  • MGM held well above normal and higher than last November’s low hold
  • High hold contributed to 39% YoY GGR growth, 2nd highest in the market
  • Mass market share was only 6.4%, the 3rd lowest of its history
  • We think MGM has the most to lose by WYNN’s recent Mass push and that indeed played out in November

Galaxy

  • Galaxy led the market in GGR growth for the 2nd straight month
  • Hold was well below normal
  • Mass and Rolling Chip volume share was above recent trend
  • Solid month from Galaxy

December 6, 2013

December 6, 2013 - ja dtr


Looking In The Rear-View Mirroe

Client Talking Points

US DOLLAR

Alas, GDP is a lagging indicator. So... as the 10-year yield makes a lower-high versus the Q313 top, look at what Mr. Market is telling you via the leading indicator in our model: The US Dollar. The greenback is down for four consecutive weeks now after being down -0.41% yesterday. #broken

UST 10YR YIELD

Levels matter versus the prior high. If the 10-year yield can’t make a higher high versus the pre-Fed-no-taper September closing high (and we get anything average in an employment report), no-taper can knock 20-30 basis points out of this rate rally. Fast.

UK

Just awesome. Both home prices (+7.7% year-over-year in November versus 6.9% in October) and autos (+7% November versus +4% October) are loving what Americans loved in Q2-Q3 of 2013. What's that? Strengthening purchasing power via a #StrongCurrency. Go Pound.

Asset Allocation

CASH 38% US EQUITIES 12%
INTL EQUITIES 14% COMMODITIES 4%
FIXED INCOME 8% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

3.6% GDP and +200k handles on jobs and these morons are going to try no-taper again @federalreserve

QUOTE OF THE DAY

"I knew if I didn't leave my bitterness and hatred behind, I'd still be in prison." - Nelson Mandela

STAT OF THE DAY

Most British workers under 50 will have to work longer than expected after the government unveiled plans to introduce the highest retirement age in the developed world. Under the reforms, the pension age will be linked to rising life expectancy and reflect the U.K. government's belief that workers should spend no more than a third of their adult life in retirement. The state pension age of 68 will now be enforced in the mid 2030s, about 10 years earlier than planned. And by the late 2040s it will rise to 69.


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