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Top 10 Reasons to Stay Short The Euro

This note was originally published November 05, 2014 at 12:38 in Macro

Below are the top 10 reasons we continue to recommend short EUR/USD (etf FXE) over the intermediate term TREND: 

  1. ECB Indecision:  We expect the ECB to continue to fumble with its policy messaging and for its policy “tools” to underperform its expectation to guide the economy out of its deflated state. (Interestingly, Reuters reported yesterday that Eurozone central bankers are having a working dinner with ECB President Draghi tonight to discuss his “secretive style and erratic communication”).
  2. Policy Relativity: On a relative basis, the Fed has lifted its foot off the QE gas petal while the ECB (and BOJ) is pushing down harder on the petal. Draghi has already target a €1 Trillion expansion to the ECB balance sheet. That number could go higher given the BOJ comp.  
  3. ECB All-In:  The ECB has telegraphed that it may in fact issue sovereign QE following a mixed message on the ability of the TLTROs and/or ABS and covered bond purchasing programs to deliver real growth “drugs” to the region.
  4. Into the Shadows:  The ECB has no where left to cut from the ZERO bound in interest rates.  Attempting to push the so-called shadow rate lower via large scale asset purchases becomes the recourse.  
  5. Extended Outflows:  Record outflows of investment from Europe will continue to put downward pressure on the EUR.  ECB data showed that domestic and foreign investors pulled out €187.7B from the Eurozone, which is the most since the EUR was launched in 1999.
  6. Broken Quantitatively:  The EUR/USD is broken across our intermediate and long term TREND and TAIL lines (see chart below).
  7. Downward Dog:  Eurozone country growth expectations have further room to run lower in 2014 and 2015 (just cut by European Commission). #EuropeSlowing
  8. Peripheral Pressure: The Eurozone’s PIGS, despite commitments, will struggle to meet their deficit consolidation targets, as cracks remain in the banking sector (Italy had 9 banks fail the ECB’s 130 Bank Comprehensive Assessment).
  9. Putin Pangs: Putin’s Pull over Ukraine and Western Europe’s gas looms ever present to engage the geopolitical risk card.
  10. Separatist Solidarity: The rise of the Right and splinter groups that are anti-EU [across Germany (Alternative for Germany, AfD), France (Popular Front), to bold movements across Greece, Austria, Netherlands, to name a few] are growing and calling for separation from the EUR.

This is a simplified hit parade – ping us if you’d like to dig into any of the points above.

 

Top 10 Reasons to Stay Short The Euro  - chart2

 


Top 10 Reasons to Stay Short The Euro

Below are the top 10 reasons we continue to recommend short EUR/USD (etf FXE) over the intermediate term TREND: 

  1. ECB Indecision:  We expect the ECB to continue to fumble with its policy messaging and for its policy “tools” to underperform its expectation to guide the economy out of its deflated state. (Interestingly, Reuters reported yesterday that Eurozone central bankers are having a working dinner with ECB President Draghi tonight to discuss his “secretive style and erratic communication”).
  2. Policy Relativity: On a relative basis, the Fed has lifted its foot off the QE gas petal while the ECB (and BOJ) is pushing down harder on the petal. Draghi has already target a €1 Trillion expansion to the ECB balance sheet. That number could go higher given the BOJ comp.  
  3. ECB All-In:  The ECB has telegraphed that it may in fact issue sovereign QE following a mixed message on the ability of the TLTROs and/or ABS and covered bond purchasing programs to deliver real growth “drugs” to the region.
  4. Into the Shadows:  The ECB has no where left to cut from the ZERO bound in interest rates.  Attempting to push the so-called shadow rate lower via large scale asset purchases becomes the recourse.  
  5. Extended Outflows:  Record outflows of investment from Europe will continue to put downward pressure on the EUR.  ECB data showed that domestic and foreign investors pulled out €187.7B from the Eurozone, which is the most since the EUR was launched in 1999.
  6. Broken Quantitatively:  The EUR/USD is broken across our intermediate and long term TREND and TAIL lines (see chart below).
  7. Downward Dog:  Eurozone country growth expectations have further room to run lower in 2014 and 2015 (just cut by European Commission). #EuropeSlowing
  8. Peripheral Pressure: The Eurozone’s PIGS, despite commitments, will struggle to meet their deficit consolidation targets, as cracks remain in the banking sector (Italy had 9 banks fail the ECB’s 130 Bank Comprehensive Assessment).
  9. Putin Pangs: Putin’s Pull over Ukraine and Western Europe’s gas looms ever present to engage the geopolitical risk card.
  10. Separatist Solidarity: The rise of the Right and splinter groups that are anti-EU [across Germany (Alternative for Germany, AfD), France (Popular Front), to bold movements across Greece, Austria, Netherlands, to name a few] are growing and calling for separation from the EUR.

This is a simplified hit parade – ping us if you’d like to dig into any of the points above.

 

Top 10 Reasons to Stay Short The Euro  - zz. euroo

 

Matthew Hedrick

Associate


Cartoon of the Day: Gas Prices

Takeaway: If all that mattered to US Consumers was gas prices (it's only 6.4% of median consumer budget) all of those rosy “surveys” would be right.

Cartoon of the Day: Gas Prices - Gas cartoon 11.04.2014


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

OIL: MORE DOWNSIDE?

Takeaway: OIL remains in a BEARISH Set-Up without a near-term catalyst to put in a hard support level.

In three recent notes, we highlighted why oil had more downside pressure:

TAKEAWAY: “The expectation for a supply/demand floor is not a catalyst for volatility-induced real-time market moves”

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

TAKEAWAY:

  • “Most analysis has underestimated technological advancement in production and recovery efficiency
  • Model-driven analysis in this space anchors on old information, holding rapidly changing variables static, rather than leaning on real-time, data-driven facts

The biggest mistake in consensus analysis is that it does not accurately weigh each production area within a formation. It uses a gross average for each area within a formation with each area equally weighted.

The lowest cost areas are by far the largest producers. For example McKenzie County, ND in Bakken makes up almost 1/3rd of the formation's production and is by far the lowest cost area with a break-even price in the $20-$30 per barrel range.”

------

WTI Crude Oil is BEARISH on both a TREND and TAIL duration:

 

Oil would have to retrace and move above its intermediate and longer-term resistance levels for our model-driven process to shake its bearish bias over those durations.

 

TRADE (3 Weeks or Less) Risk Range: $76.43-$80.51

TREND (3 Months or Less) Resistance: $91.67

TAIL (3 Years or Less): $96.05

 

OIL: MORE DOWNSIDE? - WTI Levels

 

With the domestic economy slowing and deflation taking hold (#QUAD4 set-up), monetary policy out of the ECB and BOJ continue to provide support for lower oil prices.

Both WTI and BRENT moved out of red territory this morning after marginally bullish U.S. inventory data from the Department of Energy and news of a pipeline explosion in Saudi Arabia. While the weekly inventory data is always a catalyst for intraday volatility on the number, we disregard the weekly comps until we see an extended sequential trend in the time series.

 

Very simply, we continue to believe supply cuts near-term will disappoint to support current price levels.

 

Conclusion:

  • The November 27th OPEC meeting is unlikely to bring news of a collective supply cut (the aforementioned note from October 23rd explains this argument in more detail)
  • Because of the 1) Upfront Capital Commitment for many projects, 2) long-term contractual commitments, and 3) the lag for daily mark-to-market losses to become real, booked reported losses production will continue until at these levels or lower over the intermediate-term

Please reach out with any comments or questions as we continue to comment on this topic.

 

Ben Ryan

Analyst

 


FLASHBACK | Hedgeye's Howard Penney Said Short $CHUY Last Week; The Stock Is Down Over -30% Today

Takeaway: Hedgeye restaurants sector head Howard Penney added Chuy's (CHUY) to our Best Ideas list as a short on 10/28. CHUY is down over -30% today.

Editor's note: This report was originally published October 28, 2014 at 06:09 in Restaurants. CHUY is down over -30% since Penney made this short call.

FLASHBACK | Hedgeye's Howard Penney Said Short $CHUY Last Week; The Stock Is Down Over -30% Today - hwp

 

We’ve covered the majority of our shorts in the casual dining space, but remain bearish on a select few stocks.  Today, we’re adding one of these names, CHUY, to the Hedgeye Best Ideas list as a short.

 

Three Key Points:

  1. In addition to being phonetically challenging, the Chuy’s brand is having difficult generating awareness is new markets.  The street is assuming that other states will be able to produce the same levels of revenues and returns generated in its core market (Texas) as it pursues its nationwide expansion plans.
  2. The issues associated with a disappointing 2013 class of restaurants are not a one quarter issue.  In fact, AUVs have declined every single quarter since 4Q12, a trend we believe will persist for the balance of 2015.  The concept has already proven it doesn’t travel well, suggesting growth expectations are being overvalued in the marketplace today.  Considering an onslaught of new, underperforming restaurants, the cost structure of the company is deleveraging.  This, coupled with increasing food and labor costs, likely means that more margin deterioration is on the way – precisely what the street is missing.
  3. Trading at 33x consensus NTM EPS, CHUY is currently one of the most expensive publicly traded casual dining stocks.  The company has maintained a premium valuation despite declining AUVs, returns and consensus EPS estimates.  Furthermore, we believe 2014 and 2015 earnings estimates are too high, which would imply this 33x multiple is closer to 39x by our estimates.  We see 30-40% downside in this name and believe 3Q14 earnings will be the catalyst the shorts are looking for.

 

CHUY has been on our Long Bench for the majority of 2014, until recently when we spotted several disconnects between the street’s expectations and reality.  For this reason, we believe the current issues the company faces will take longer to correct than most are giving them credit for.  At 39x NTM EPS, we believe there are too many risks in the current business, and the future of the business, to support such a multiple.  Importantly, we believe 3Q14 earnings will be the downside catalyst shorts are hoping for.

 

Our short thesis focuses on the following:

  • Disappointing new unit productivity
  • Cash burn necessitates the current new unit growth rate
  • Rampant support from the biased bulls (read: high expectations, aggressive estimates)
  • Significant insider selling
  • Strong sell-side sentiment and unjustified premium multiple
  • Significant food inflation (dairy, beef, avocados, produce)
  • Overly optimistic consensus food and labor cost assumptions in 2H14
  • A lack of leverage in the business model considering higher year-over-year G&A, D&A and pre-opening spend
  • Aggressive 2H14 and 2015 EPS estimates
  • Approximately 30-40% downside to the name

 

We’re in the early stages of this earnings season and, so far, we’ve seen bigger casual dining chains posting slightly stronger sales trends than a year ago.  While this trend is important to consider, some of this sales growth is coming at a significant cost to margins.  To that extent, Wyman Roberts, CEO of Brinker, recently said on the company’s earnings call: “If you look at NPD numbers 12 months rolling August, the category hit the highest deal rate that it’s ever hit, and some players in there are reaching some pretty aggressive numbers.”

 

So while gas prices may be helping the macro picture, it’s undoubtedly difficult to gauge the impact that increased discounting is having on several players in the industry.  What we do know, however, is that discounting is never good for margins.

 

Chuy’s looks to be one of the promising companies that can beat on the top-line, however, we suspect it will miss on margins and earnings.  The bulls on CHUY will likely point to stronger industry trends and the unexpected price increase management enacted sometime in September (we believe) to help mitigate the margin pressure the company is facing.  While both of these may likely occurred in the quarter, it will not be enough to save it. 

 

The underperformance of new units, in addition to lower margins, puts the company in a difficult spot, increasing the need for the company to tap the capital market in order to deliver on aggressive unit growth plans.  Over the past 12 months, capital spending has grown by 29%, while the cash burn has more than doubled to $12 million.

 

From a sentiment standpoint, one issue of concern on the short side is the 18% of short interest.  The average casual dining chain is running closer to 9.8%, so Chuy’s issues are fairly widely known.  Given the massive declines we’ve seen in restaurant stocks this year (with higher short interest) and the fact that insiders have been selling shares faster than gazelles, we believe the short side is a much better place to be.

 

We look forward to sharing more with you on the call.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst



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