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Europe’s Rosy Near-term Outlook

Position: Long Germany (EWG); Short Italy (EWI) and Euro (FXE)

 

As we mentioned in the Early Look this morning, this week global markets are tuned squarely to Europe’s bond auctions and statements from the region’s leaders on its sovereign debt issues. This morning also saw announcements from the ECB and BOE to keep their main interest rates on hold at 1.0% and 0.5%, respectively; and while the BOE has recognized the risk of rising inflation this year, today ECB President Trichet made it clear that he’s willing to raise rates to fight inflation.

 

Over the short-term we’d expect European markets to continue to make gains on the heels of announcements from China (earlier this month) and Japan (on Tuesday) to buy European bonds and statements from EU Economic and Monetary Commissioner Olli Rehn (yesterday) that EU officials are trying to forge a “comprehensive” plan to contain the sovereign debt crisis and from German Chancellor Angela Merkel who indicated a desire to do “whatever is needed to support the euro.”  Rehn also ruled out debt restructuring for Greece or any other euro-area member state.

 

As a catalyst, European finance ministers meet in Brussels next week to discuss initial details of a more "comprehensive package" and German Finance Minister Wolfgang Schaeuble said today that the EU member states will assemble this package by March when EU leaders are schedule to meet for a summit. 

 

With this kind of support, it’s no surprise that investors cheered, markets boomed, and European bond auctions have found plenty of demand, including Spain’s auction of €3 billion of 5YR bonds (at 4.542%) this AM.

 

While yesterday saw substantial outperformance from the peripheral equity markets, with gains from: Spain’s IBEX +5.4%; Greece’s Athex+ 5.0%; and Italy’s FTSE +3.8%, today these same equity markets closed in positive territory, however with lesser gains: Spain’s IBEX +2.7%; Greece’s Athex +0.3%; and Italy’s FTSE +0.9%.

 

It was on the bounce yesterday that we shorted Italy via the etf EWI and the Euro via FXE in the Hedgeye Virtual Portfolio.

 

However, and arguably as a more important forward-looking indicator, credit markets have improved substantially over recent days.  Below we refresh the chart of 10YR bond yields of the PIIGS (see chart). You’ll note that yields (on the 10YR) have fallen precipitously since 1/7, down -144bps in Greece; -77bps in Ireland; -35bps in Portugal; -16bps in Spain; and -9bps in Italy as risk abates on the aforementioned supportive announcements.

 

Europe’s Rosy Near-term Outlook - HEUTE

 

Importantly in this chart we flag the gravitational pull of the 7% level. This level proved ominous last year for it was a mere 17 days after Greece broke through it that the country received a €110 Billion bailout (May 15, 2010), whereas Ireland received a bailout of €85 Billion a month after breaking through the line on October 29th. Portugal is dangerously near this level.

 

Long-Term Woes

 

However, over the longer term our concerns for the region remain grave: the road ahead for Europe will be mired in the inability of some governments to meet their targeted debt and deficit reduction figures (Italy, Spain, Portugal), and the bailout band aids that we’ve seen already in Greece, Ireland, and perhaps Portugal soon, will simply offer temporary solutions to longer term fiscal imbalances. Further, along with lower growth prospects across the region this year and next, we could see more pushback on the austerity measures issued by many governments and political instability from countries like Italy, Belgium, and Hungary, to name a few.

 

Perhaps blame for Europe’s woes can be attached to the idealistic goal of binding unequal states under a common currency and monetary policy, but what’s clear is that the EU and Eurozone must figure out longer term attainable policy to punish fiscal excesses and incentivize its member states to maintain fiscal balance. 

  

In any event, European markets could soon lose the near-term support we’re seeing across European markets. It all depends on the means in which European officials want to support and direct this ship. We could learn more on this front as soon as next week.

 

Matthew Hedrick

Analyst


R3: GPS, ZQK, Fleet Feet, More Snow

R3: REQUIRED RETAIL READING

January 13, 2010

 

 

 

RESEARCH ANECDOTES

  • In one of the more aggressive clearance efforts we’ve seen in a while, Old Navy will be throwing a “Practically Free For All” sale this weekend.  The aggressive promotion promises discounts of up to 80% on post-holiday clearance activities.  At 80% off, we agree this is “practically free”.
  • Is Dawson’s Creek readying for a comeback? In just the past couple of days, Katie Holmes and James Van Der Beek both announced endorsement deals, with Ann Taylor and Dockers respectively.  Expect the Van Der Beek campaign to take the prize however for his starring role in a viral campaign promoting a fictional brand called “DILF Khakis”.  Check it out on Funny or Die.
  • In light of the point above, a recent study shows that celebrity endorsements are largely ineffective.  The 2010 Celebrity Effectiveness study showed that fewer than 12% of ads using celebrities exceeded a 10% lift, and one-fifth of celebrity ads had a negative impact on advertising effectiveness.  In fact the average lift of non-celebrity ads was 8%, while celebrity ads returned negative effectiveness of -1.4%. 

 

OUR TAKE ON OVERNIGHT NEWS

 

Quiksilver Enters India - Quiksilver Holdings has signed a 25-year agreement with Reliance Brands Ltd. to bring its products to India, Sri Lanka, Nepal and Bangladesh. Quiksilver, which manufactures surfwear and other board-sports-related equipment, is available in 90 countries. Roxy, another of its brands, is also being brought to India. “The company plans to open six exclusive Quiksilver stores across Gurgaon, Pune, Hyderabad and Chandigarh this year,” said Darshan Mehta, president and chief executive officer of Reliance Brands.<WWD>

Hedgeye Retail’s Take:  While India is clearly on the radar of western brands, this marks one of the more formal and very long-term partnerships that we’ve seen to date.  With the potential for foreign direct investment to also finally get passed, expect more Indian expansion announcements over the near to intermediate term.

 

Jermaine O'Neal Launches Men's Line - Boston Celtics center Jermaine O’Neal isn’t about to let Amar’e Stoudemire steal the spotlight in the apparel arena. With Stoudemire linking up with Rachel Roy to launch a line of, first, women’s wear and subsequently men’s wear at Macy’s later this year, O’Neal has already quietly produced his own men’s collection, Le Jaunty, that he is hoping to roll out in 2011. The line, which has been tested at a few specialty stores, is now targeting department stores and a wider specialty store distribution.<WWD>

Hedgeye Retail’s Take:  Note to Jermaine. Your apparel line won’t last more than one, maybe two seasons.  Does anyone remember KG’s line? Or Starbury’s?

 

Athleta Opens First Full-Scale Store - The women's activewear brand owned by Gap Inc., opened its first full-scale retail location on San Francisco's renowned Fillmore Street. Gap said in a statement that the store offers Athleta's collection of women's active lifestyle apparel for yoga, running, swim, gym, hiking and skiing - designed by and for female athletes -- as well as an array of other products for both athletic and everyday pursuits. "Our customers have been asking us for a place to touch and feel the product and we are thrilled to be able to deliver on their wishes," said Kelly Cooper, Vice President of Merchandising, Design and Product for Athleta. "With Athleta's heritage rooted in Sonoma County, it was a natural fit for our first store to be located in the Bay Area, and in one of San Francisco's great neighborhoods. Our customers will have access to a wide selection of our product in an innovative and vibrant store environment providing a place to build community, and connect with the energy beauty and strength that is Athleta." The 5,000 square foot store, located at 2226 Fillmore Street, has an "open, airy feel and showcases the brand's inspirational imagery and headlines." <SportsOneSource>

Hedgeye Retail’s Take:  Finally an offensive growth move for the activewear brand that has been largely a non-event for Gap Inc.  Perhaps LULU’s monster 2010 gives management reason to believe there may be room for more than one player in the female oriented activewear space.  Key to success will be customer service and experience, both of which drive LULU’s industry leading sales per square foot.

 

Fleet Feet Surpases $100 Million in Sales - Fleet Feet, Inc. said revenues for the Fleet Feet Sports franchise in 2010 surpassed $100 million ($107M) and marked the seventh straight year of double digit comp store gains (10%). Fleet Feet, Incorporated President Jeff Phillips commented, "Our ongoing success is a direct result of our franchisees' ability to create an environment of inclusiveness where our customers can find the resources and inspiration to live a more fit life." Currently there are 90 Fleet Feet Sports stores located nationwide.   <SportsOnesSource>

Hedgeye Retail’s Take: Further confirmation that specialty running remains a key standout amongst the athletic footwear and apparel space and yet another reason why we may ultimately see RUN by Foot Locker expand beyond its current test phase.

 

N.Y. Shoppers Snowed in  - In the wake of Manhattan’s first major snowfall of the new year, consumers hit the streets Wednesday morning and stores were ready and waiting, but neither seemed to do any serious damage retailwise. Traffic at Tiffany & Co., Saks Fifth Avenue, A|X Armani Exchange, Pucci, Bottega Veneta, Ferragamo, Escada, De Beers, St. John and other designer boutiques along Fifth Avenue was sleepy. Without anyone lined up outside Hollister’s Fifth Avenue store, the velvet ropes near the entrance looked more like an art installation than a holding pen. Intrepid spenders who ventured out found plenty of sale items. <WWD>

Hedgeye Retail’s Take: Given the frequency of major storms recently, we may have consumers looking at the weather channel instead of websites and email promotions for the best post holiday deals.

 

Online Sales Delivered for Big Chain Retailers this Christmas - Thanks to big discounts and an early start, several big chain retailers reaped the benefits of a strong holiday shopping season online. In numbers reflected in the December sales reports for five big chains—Best Buy Co. Inc., No. 10 in the Internet Retailer Top 500 Guide, GameStop Corp. (No. 115), Kohl’s Corp. (No. 43), Macy’s Inc. (No. 20) and Urban Outfitters Inc. (No. 53)—customers also increased their online shopping more than their purchases in stores. <InternetRetailer>

Hedgeye Retail’s Take: E-commerce growth has outperformed brick and mortar stores for most retailers in 2010 so December performance is not exactly an exception. That said, snow bound consumers can only help drive the spread.

 

Sports Shoe Brands in China Plan Retail Expansion - A number of Chinese sports shoe brands, including Anta, Xtep, 361 Degree and Peak, plan to expand the number of their retail stores up to 10,000 in the next five years. According to the growth rate of these companies’ half year financial reports, within three years most of them will become the  10,000-retail store establishments. Sources reported that Xtep president Ding Shuibo plans to open 800 to 1000 stores this year including those to be opened in Taiwan. <FashionNetAsia>

Hedgeye Retail’s Take:  With Nike and Under Armour both intensely focused on ramping retail locations in China, the competition for retail space and brand awareness will be fierce indeed.

 

 


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INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS

Initial Claims Rise 35k

The headline initial claims number rose 35k WoW to 445k (36k after a 1k upward revision to last week’s data).  Rolling claims rose 5.5k to 417k. On a non-seasonally-adjusted basis, reported claims rose 192k WoW.  As the third chart below shows, claims are usually elevated in this week of the year. Based on the charts below it seems probable to expect that claims will continue to rise for the next several weeks.

 

As a reminder, based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.8%, it's 11.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.8% actual rate as opposed to the 9.8% reported rate.

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 1

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 2

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 3

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 4

 

MORTGAGE DEMAND TUMBLES 24% IN 2010 AND 3.7% SO FAR IN 2011


Taking a Look at the Forest

Now that 2010 is done, it's worth taking a step back and considering how mortgage demand fared throughout the whole year. On a full-year basis, the 2010 mortgage purchase applications index averaged 200, which was down 24% year-over-year when compared with the average index level of 264 for 2009. For reference, both years included a stimulative tax credit - 2009's was late in the year while 2010's was early in the year. 2010's 24% decline was a continuation of a trend that's been in place since the peak in 2005. Consider the following year-over-year changes: 2006: -14%, 2007: +4%, 2008: -19%, 2009: -23%, 2010: -24%. We think that speaks quite clearly to the longer-term trend in place in housing demand. This is in spite of affordability improving in each of these years. We would expect 2011 to be another down year for housing demand, driven by still tighter underwriting standards, a lack of incremental downside in mortgage rates and a deflationary mindset driven by further declines in home prices keeping buyers on the sidelines. 

 

Taking a Look at the Trees

MBA Purchase Applications fell 3.7% week over week. Refinance Applications rose 4.9% as mortgage rates fell. On a year-over-year basis, purchase applications were down 10%.  The charts below show the recent trends in this series.

 

<chart5>

 

<chart6>

 

<chart7>

 

<chart8>

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 5

 

INITIAL CLAIMS JUMP AND MORTGAGE DEMAND TUMBLES - 6

 

Joshua Steiner, CFA

 

Allison Kaptur


EAT: NEW LUNCH MENU $6 COMBO ROLLOUTS

Conclusion: I remain positive on Brinker for the intermediate term given the significant progress the company is making on its back-of-house margin-enhancing initiatives.  In November I reaffirmed my positive view on the stock and now the lunch day part initiatives management had spoken about are being rolled out.  I expect these initiatives to positively impact comps for Chili’s, which I expect to be in positive territory in 2HFY11.

 

The lunch day part has traditionally been difficult for Chili’s and I am encouraged by management’s efforts to drive traffic during the 11am-4pm slot.  In my most recent post focused on Brinker, I outlined the lapping of menu changes made last year, “2 for $20” becoming a permanent fixture on the menu, and the new lunch menu rollout as being three factors that would lead the concept to positive same-store sales in 2HFY11.  Below I include a screenshot of the promotion email and also EAT’s quadrant chart, which shows EAT currently in the “life-line” quadrant with positive year-over-year margin growth and negative same-store sales.  I anticipate a migration into the “nirvana” quadrant (positive year-over-year margins and same-store sales) in 2HFY11.

 

EAT: NEW LUNCH MENU $6 COMBO ROLLOUTS - chili s promo

 

EAT: NEW LUNCH MENU $6 COMBO ROLLOUTS - eat matrix

 

Howard Penney

Managing Director


INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS

Initial Claims Rise 35k

The headline initial claims number rose 35k WoW to 445k (36k after a 1k upward revision to last week’s data).  Rolling claims rose 5.5k to 417k. On a non-seasonally-adjusted basis, reported claims rose 192k WoW.  As the third chart below shows, claims are usually elevated in this week of the year. Based on the charts below it seems probable to expect that claims will continue to rise for the next several weeks.

 

As a reminder, based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.8%, it's 11.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.8% actual rate as opposed to the 9.8% reported rate.

 

 INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - rolling

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - raw claims

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - claims nsa

 

Yield Curve Continues to Widen

We chart the 2-10 spread as a proxy for industry NIM. Thus far the spread in 1Q11 is tracking 38 bps wider than 4Q10.  The current level of 276 bps is up from 272 bps last week.

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - spread

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - spread QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS JUMP AND SHOULD REMAIN HIGH FOR SEVERAL WEEKS - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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