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#EuropeSlowing – Austerity Is Dead?

This note was originally published at 8am on October 10, 2014 for Hedgeye subscribers.

“Some day, following the example of the United States of America, there will be a United States of Europe.” 

-George Washington


Well, if Washington is right, “some day” is still a long ways off. 


In fact, over the intermediate to longer term we expect the culture clash that is the Eurozone to continue transpiring – from the top (Brussels and the ECB) right on down to the bottom (individual member states).


Our macro playbook continues pointing to a Euro with potential downside from here (it’s down around -9% since May and is broken across TREND and TAIL durations in our quantitative models). Despite ECB President Mario’s Draghi’s pledge “to do whatever it takes” (and lever up the balance sheet by €1 Trillion) to support growth and inflation, we’re not buying the promise of Draghi’s Drugs producing sustainable economic growth.


Why?  Because we expect some member states to be very slow in passing the necessary fiscal and labor market reforms to improve their competitiveness. 


#EuropeSlowing – Austerity Is Dead? - yyy. EUR USD


Back to the Global Macro Grind


And so the culture clash took another turn this week when the French government announced that austerity is dead and that it would not meet its original deficit reduction target. This shot across the bow stands to reignite tension with the fiscally conservative member states (Germany in particular) and may influence the policy stance of other members (like Italy) that have A) long questioned the merit of austerity, B) have yet to deliver on a full package of reforms, and C) like France, are looking to push out their own deficit timetable. 


Specifically, France in its 2015 budget stipulated that it would adapt a pace of deficit reduction parallel to the economic situation of the country. Therefore, instead of meeting the original target of 3% deficit by 2015, the country would push out that target by an additional two years.


And so for the first time in history, the European Commission may exercise its power to reject France’s budget and ask for a new one.  A resolution could come at the end of the month.


In follow-up remarks, French Finance Minister Michel Sapin has said that the EU must shift its policy to avert the threat of prolonged low growth and low inflation (along with boosting investment), if Europe was to prevent being stuck in Japanese-style stagnation.


Here’s the rub playing out from Top to Bottom:

  • The European Commission (EC) and ECB: (pointing the finger at a select group of member states): “You guys need to reform (more).”
  • The Member States Being Accused: (pointing the finger back) “We just issued loads of “austerity” to minimize the public sector, reduce our borrowing costs and improve our credit rating, yet in doing so we’ve choked off growth, are saddled with record high unemployment rates, and have zero ability to manipulate policy to make ourselves more competitive than our European peers. We’re done with this course of action, so be your expectations for deficit and debt consolidation!”
  • The EC and ECB: “But if you don’t reform at the state level, there’s no chance our newest programs (ABS & covered bond buying programs and TLTROs) will have any chance of success!”

The problem is that countries like France haven’t done enough.  For proof of the shortfall, France’s government spending still stands at a monster 55% of GDP. And as an anecdote, the Magic Kingdom a la France (Disneyland Paris) reported this week that it needs a bailout to the tune of $1.25 Billion. The company cited French labor laws and planning regulations making it difficult to replicate the success of the other Disney enterprises, and called-out in particular the high cost of employing French workers.


Similar structural shortfalls could be identified in Italy, which just this Wednesday happened to host an EU Summit in Milan to discuss job creation.


And so as the “rub” between the Top and Bottom plays out, Eurozone growth stands to suffer as there’s no clear action plan on how to fix it.  This week the IMF (a classic lagging indicator) revised down its global GDP forecast and specifically took the Eurozone GDP outlook to 0.8% in 2014 (vs a prior estimate of 1.1% July) and 1.3% in 2015 (vs prior 1.5%).


A quick look at key Eurozone data metrics over the last two weeks shows a similar trend downward:

  • Eurozone PMI Services fell to 52.4 SEPT (exp. 52.8)
  • Eurozone PMI Manufacturing fell to 50.3 SEPT (exp. 50.5)
  • Eurozone PMI Retail Sales 44.8 SEPT vs 45.8 AUG
  • Eurozone Sentix Investor Confidence -13.7 OCT (exp. -11) and -9.8 SEPT
  • Eurozone Business Climate 0.07 SEPT (exp. 0.10) vs 0.16 AUG
  • Eurozone Economic Confidence 99.9 SEPT (inline) vs 100.6 AUG
  • Eurozone Industrial Confidence -5.5 SEPT (exp. -5.8) vs -5.3 AUG
  • Eurozone Consumer Confidence -11.4 SEPT vs -10 AUG
  • Eurozone Unemployment Rate UNCH at 11.5% AUG
  • Eurozone CPI fell 10bps to 0.3% Y/Y in SEPT

Our bottom-up, qualitative analysis (e.g. our Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates). We discussed this point in depth on our Q4 2014 Macro Themes Call on 10/2 (email sales@hedgeye.com if you’d like access) in our theme #EuropeSlowing (one of three).


Our key conclusions include:

  • We do not believe Draghi will be able to turn the tide of deflation (see chart below) and growth through his policy tools alone. German Finance Minister Wolfgang Schaeuble has repeatedly said the ECB has “run out of tools” and that “cheap money can’t force growth”
  • We expect the recent package of “supportive” measures (ABS and covered bond purchasing program and TLTRO) to come up short of expectations. Recall as an initial read-through that demand was light for the first round of TLTRO at €83 Billion vs estimates of €150-300 Billion
  • Should Sovereign QE become a reality, expect push back from member states (think uproar over OMT and hearings from the German Constitutional Court)
  • We believe it’s still largely unlikely that a sovereign QE program can support sustained economic growth (witness years of shortcoming on this front from the Japanese).
  • From an investment position, we are recommending shorting French (EWQ) and Italian (EWI) equities and the EUR/USD (FXE).

The former President of France Jacques Chirac once said: “The construction of Europe is an art. It is the art of the possible”. Indeed, if the Eurozone is to become a functioning United States of Europe, it’s just in the initial sketch stage.


Our immediate-term Global Macro Risk Ranges are now:


SPX 1921-1956

DAX 8821-9241

USD 84.89-86.63

EUR/USD 1.25-1.27

WTI Oil 84.02-89.82

Gold 1195-1230


Matthew Hedrick



#EuropeSlowing – Austerity Is Dead? - YYY. CPI


TODAY’S S&P 500 SET-UP – October 24, 2014

As we look at today's setup for the S&P 500, the range is 128 points or 5.94% downside to 1835 and 0.62% upside to 1963.                                                  













  • YIELD CURVE: 1.87 from 1.89
  • VIX closed at 16.53 1 day percent change of -7.50%


MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: New Home Sales, Sept., est. 470k (prior 504k)
  • 1pm: Baker Hughes rig count



    • Senate, House out of session
    • 9:30am: House Oversight hearing led by Chairman Darrell Issa, R-Calif., on U.S. response to Ebola
    • 9:40am: EPA Administratior Gina McCarthy delivers keynote remarks on “The Future of Energy & Our Environment”
    • U.S. ELECTION WRAP: N.C. ‘Political Hate’; Outlook in Arkansas



  • New York Man Diagnosed With Ebola as Authorities Track Movements
  • Amazon Faces Season of Worsts as Losses Mount Before Holidays
  • Sony, Apple to Introduce Large Tablets in 1Q 2015: DigiTimes
  • Google Said to Buy Six Silicon Valley Buildings for $585m
  • Toyota Sells Tesla Shares as Joint Electric RAV4 Project Ending
  • Lockheed, Pentagon Reach $4b Deal on F-35 Jets: Reuters
  • AMC Networks Pays $200m for 49.9% BBC America Stake
  • Occidental CEO Sees Lower Drilling Fees If Oil Slump Continues
  • RealPage Approached by at Least 2 PE Groups, FT Says
  • Amtrak Weighs Selling Land for Development in 5 U.S. Cities
  • Goldman, Inner Circle Hired by NBA’s Atlanta Hawks to Sell Team
  • Regulators Ramp Up Bond Fund Exams in Response to Price Swings
  • Swiss Banks Urge U.S. to Amend Demands in Tax Amnesty Deals
  • ECB Vies for Third Time Lucky on Stress Tests as New Role Dawns
  • U.K. Economic Growth Slows as Headwinds to Recovery Increase
  • Actavis CEO Saunders Has $70b in Deals From Which to Choose
  • Billionaire Fredriksen to Make Mandatory Bid for Flex LNG
  • BASF Cuts 2015 Goals as Delayed European Growth Hurts Demand
  • Chiquita Brands holds special shareholder meeting
  • Fed, ECB Tests, U.S. GDP, Facebook: Week Ahead Oct. 25-Nov. 1



    • Aaron’s (AAN) 7am, $0.37
    • Avery Dennison (AVY) 8:30am, $0.74
    • Bristol-Myers Squibb (BMY) 7:30am, $0.42 - Preview
    • Cabot Oil & Gas (COG) 7:30am, $0.21 - Preview
    • Colgate-Palmolive (CL) 7am, $0.75 - Preview
    • Delphi Automotive (DLPH) 7am, $1.13
    • DTE Energy (DTE) 7:15am, $1.05
    • First Niagara Finl (FNFG) 7:15am, $0.18
    • FLIR Systems (FLIR) 7:30am, $0.35
    • Ford Motor (F) 7am, $0.19 - Preview
    • IDEXX Laboratories (IDXX) 7am, $0.86
    • ImmunoGen (IMGN) 6:30am, ($0.15)
    • Lear Corp (LEA) 7am, $1.88
    • LifePoint Hospitals (LPNT) 7am, $0.74
    • LyondellBasell (LYB) 6:50am, $2.30
    • Moody’s Corp (MCO) 7am, $0.90
    • NASDAQ OMX (NDAQ) 7am, $0.70
    • National Penn Bancshares (NPBC) 6:38am, $0.18
    • Omnicare (OCR) 7:30am, $0.92
    • Procter & Gamble (PG) 7am, $1.07 - Preview
    • State Street (STT) 7:12am, $1.21
    • TCF Financial (TCB) 8am, $0.30
    • United Parcel Service (UPS) 7:45am, $1.28 - Preview
    • Ventas (VTR) 7:15am, $0.45 - Preview
    • WABCO Holdings (WBC) 6:30am, $1.41
    • Wyndham Worldwide (WYN) 6:30am, $1.63



  • WTI Set for Fourth Weekly Drop as Saudi Policy Seen Unchanged
  • Iron Ore Glut Spurring Slump in China Output, Goldman Sachs Says
  • Gold Trades Near One-Week Low as Investors Assess U.S. Economy
  • Aluminum Leads Metals Declines as China House-Price Drop Widens
  • Glasenberg’s Iron Barbs Blunted by Coal Expansion: Commodities
  • Soybeans Rise on Signs of Increasing Demand for U.S. Exports
  • Romania’s Farmland Costing Fraction of U.K. Attracts Investments
  • Rebar Pares Weekly Loss on Bets Mills to Cut Output During APEC
  • Wheat Crop Seen Falling Short in Australia on Frost, Hail Damage
  • Weak El Nino Seen Evolving by Year-End as Sea Warmer Than Usual
  • Don’t Assume Saudi Supply Drop Was Move to Bolster Oil Price
  • Vale Coming of Age as a Nickel Heavyweight Just as Prices Plunge
  • Gold Traders Bullish a Fourth Week on Physical Demand to Economy
  • MORE: China’s Copper Output Climbs to Record High in September


























The Hedgeye Macro Team


















October 24, 2014

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investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


Takeaway: A production cut from OPEC near-term is unlikely, especially with new competition threatening to take global market share.

The argument that OPEC is making a strategic move to put its foot on the gas from a production standpoint to test unconventional production sources ahead of a meeting where it will cut production targets will disappoint as a bullish catalyst in our opinion.

For one, we have no reason to believe OPEC has a good understanding of the technological advancement in production efficiency in North America.


We’ll be hosting a call with analysis on this topic next Tuesday, October 28th. Please email for access.


Real Cost of Producing Tight Oil and Shale Gas: Fact vs. Fiction


Secondly, at no time in recent history has OPEC leveraged itself, banded together without internal conflict, and proven to be a functional organization. All of the countries within the Organization of have played this chess match internally with one another throughout history while continuing to produce at whatever levels they deem necessary to boost the domestic economy. When conflict has reduced capacity between OPEC members, others have stepped in to ramp up production and take market share.

Now most OPEC economies are completely dependent on oil production:

  • OPEC holds an estimated 60% of the world’s reserves and 30% of total supplies. Venezuela, Angola, and Iran (all higher cost producers) have all reportedly pushed for collective supply cuts
  • Oil and Gas accounts for roughly half of GDP and 3/4ths of export earnings on average among OPEC countries: Each member is constantly seeking an increasing share of the global marketplace
  • OPEC’s largest producer, Saudi Arabia, receives 85% of its export earnings from the oil and gas sector

OPEC Losing its Strength


Even if the organization collectively agrees, for the first time since the 70s and 80s they run the risk of losing major market share to those outside of the organization.


OPEC's NEXT MOVE - Global Oil Demand


While spare capacity within OPEC countries remains relatively constant…


OPEC's NEXT MOVE - OPEC Spare Capacity


Of most significance to the expectation of an announcement of FORMAL production cuts, the vote must be unanimous among member countries

In article 11.C of OPEC’s Statute, it says “Each full member country shall have one vote. All decisions of the conference, other than on procedural matters, shall require the unanimous agreement of all full members.”

Member Countries agree by unanimous vote on any such production ceilings and their allocation to the respective member countries. At the same time, each member country retains absolute sovereignty over its oil production.

In just the last ten years, the expectation of a fair oil price has been much lower than current levels:

  • In 2002 OPEC agreed that a fair price on crude oil should be set between $22 and $28 a barrel
  • By 2006 Qatari Energy Minister Abdullah Attiyah maintained that a fair market price for crude oil should be in the range of $50 to $55 a barrel
  • $80/barrel will now spark unanimous collaboration in cutting production levels? Doubtful.

The largest producers can handle oil much lower and they will not agree to production cuts as OPEC’s collective grip on controlling global energy prices is waning.

Assuming we did experience a decline in oil imports from OPEC members, we’re closer to self-sustainability even if we don’t lift the export ban.


OPEC's NEXT MOVE - DOE U.S. Crude Imports From OPEC


However, in a recent note we outlined the current pressure on Washington to lift the export ban which would be even more threatening to OPEC’s influence:


Can the U.S. Shale Boom Be Stopped


The following piece is an excerpt from the note:



  • export ban on oil implemented after the oil embargo in the 1970s
  • The Jones Act (1920) requires that oil has to be shipped by Americans in smaller ships:
  • It costs around $5-$6 a barrel to ship crude from the Gulf of Mexico to the US east coast on a US-flagged vessel, but only $2 to ship to Canada’s east coast on a foreign-flagged vessel

South Korea and other NATO allies have verbally challenged the U.S. ban on the back of our recent increase in domestic production capacity. Last week the EU’s commissioner for trade, Karel De Gucht, emphasized the need to free up more sources of oil and gas for a wider and more effective free-trade agreement to be instituted.     

The Office of the U.S. Trade Representative and the NSC have held internal discussions with the Obama Administration on how to deal with a challenge from the international community. Washington was able to make a national security argument for implementing the ban back when it was importing most of its crude oil, but the added production from the Shale boom is challenging the credibility of that argument.

With added geopolitical tension globally this year, both Asian and European allies are pushing for diversified supply lines. Strengthening their argument, the U.S. just took China to the WTO earlier this year and won a case accusing Beijing of hoarding raw materials and precious metals. Under International Trade rules (General Agreement on Tariffs and Trade), the argument for upholding the restrictions on the exporting of U.S. fossil fuels may be too hypocritical to justify.”

However, Iranian spokesmen came out Tuesday and said that they weren’t concerned about prices at these levels which seemed interesting in crafting the argument that OPEC is testing new and unconventional energy plays. As difficult as it’s been to pin down the per unit production costs associated with U.S. shale plays, public comments from member nations suggest they are still getting to the bottom of production breakeven costs from unconventional sources in other parts of the world.

In summary, there two major factors threatening OPEC’s stance in the global energy trade:


1. The U.S., the world’s largest consumer, is much less reliant on OPEC production and U.S. supply continues to surprise on the upside according to weekly DOE inventory data released yesterday:


OPEC's NEXT MOVE - OPEC.U.S. production Ratio


Supply (beat to the upside)

  • DOE U.S. Crude Inventories 7111K vs. 2800K est. (8923 prior)
  • DOE Cushing, OK Crude Inventories 953K vs. 716K prior
  • DOE U.S. Gas Inventories -1299K vs. -1560K est. (-3995K prior)

Demand (Less than Expected)

  • Crude Oil Implied Demand 15395K vs. 15416K est.
  • DOE Gasoline Implied Demand 9283K vs. 9489K est.


 2. The U.S. is continuously closer from an infrastructural and regulatory standpoint to becoming an exporter which means we could step in and take share (or at least create the expectation that we’ll take share) if OPEC were to cut production targets.


OPEC is scheduled to meet in Vienna on November 27th for one of two annual meetings, and a few members have called for an emergency meeting beforehand, but current price levels are not a threat to the largest producers making any collaboration among members of the organization highly unlikely.

  • OPEC pumped 30.96M B/D on average in September vs. its 30M B/D target (30.15M B/D in August)
  • OPEC’s own estimates are for its crude demand to be 29.20M B/D ( verbally attributed to the U.S. shale boom and other unconventional supply elsewhere) on average in 2015, well below what it’s currently pumping.

OPEC's NEXT MOVE - OPEC Excess Supply




Please feel free to reach out with any comments or questions.


Have a great evening.


Ben Ryan



Video | 3D Printing Marketplace [Conference Call Excerpt]

The Hedgeye Industrials Team hosted a conference call with David O. Smith, former COO of Shapeways, on October 20th, 2014. David discussed the current 3D printing landscape and the future of the democratization of manufacturing. 

Ping sales@hedgeye.com for more information or to gain full access to this call. Please note if you are not a current subscriber to our Industrials research there will be a fee associated with this call. 






The Hedgeye Macro Team will be hosting a conference call next Tuesday, October 28th at 11:00am EDT on two misunderstood but heated topics in the energy space:

  1. The technological advances in oil and gas extraction from shale resources and its impact on the marginal cost of tight oil and shale gas production
  2. The opportunities and obstacles for U.S. participation in global LNG trade

On the call, we will be joined by specialist Leonardo Maugeri, former executive of Eni S.p.A., Italy's largest energy company. Dr. Maugeri is currently an associate with the Geopolitics of Energy Project and the Environment and Natural Resources Program at the Harvard Kennedy School's Belfer Center for Science and International Affairs.



  • Dispel the un-factual conclusions creating the wide variance in perceived production costs associated with U.S. shale plays with an analysis of the wide differences in production costs within just one shale play (regional analysis within Bakken). As a whole, consensus underestimates the technological and logistical advancement of oil and gas extraction from shale resources.
  • U.S. LNG is the most competitive of any non-traditional source globally, but because of all the essential infrastructural and logistical investments that must take place, current natural gas prices are a large burden for private investment.



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 494176#
  • Materials: CLICK HERE (slides will be available approximately 1 hour prior to the call)

Ping for more information.




Dr. Maugeri is currently an Associate for the Environment and Natural Resources Program at Harvard's Geopolitics of Energy Project. Prior to his current post he held the title of Executive Chairman of Polimeri Europa, Eni's Petrochemical Branch, from March 2010-June 2011. Before Polimeri, Dr. Maugeri spent eight years as Senior Executive Vice President of Strategies and Development at Eni S.p.A. from 2000-2010.


Dr. Maugeri has gained recognition for researching and predicting the shale gas and tight oil boom In the early 2000s. He has written four books on energy including the following:

  • The Age of Oil: the Mythology, History, and Future of the World's Most Controversial Resource
  • Beyond the Age of Oil: The Myths and Realities of Fossil Fuels and Their Alternatives

In addition to his involvement in the Geopolitics of Energy Project, he is a member of MIT's External Advisory Board, an International Counselor of the Center for Strategic and International Studies (Washington, D.C.), a member of the Global Energy Advisory Board of Accenture, and a senior fellow of the Foreign Policy Association (New York). 


Macro Team


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