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Cliff Notes From Our Eurozone Call

Earlier today, my colleagues and I hosted a call on the outlook for the Eurozone.  The replay is worth your time when you get a few minutes, but I wanted to flag two of the most critical components of the presentation, which were the slides that outlined the exposure of the German and French banks to the PIIGS.


I’ve posted them below, but they are worth printing off and taking into the next investment team meeting at your firm.  This is the crux of Europe.  Even the strong economies are only as strong as their banks.


To wit: 

  • German banks have €69.7 billion in capital and have a combined €523 billion in PIIGS exposure (non-bank private sector, banks, and sovereigns); and
  • French banks have €134 billion in capital and have a combined €671 billion in PIIGS exposure (non-bank private sector, banks, and sovereigns). 

The interconnected web of European debt and monetary policy is going to be a behemoth to untangle.


As Milton Friedman wrote in 1999:


“Once the euro physically replaces the separate currencies, how in the world do you get out? It’s a major crisis.”


We are long the U.S. dollar in the Virtual Portfolio via the etf UUP.


Daryl G. Jones

Director of Research 


Cliff Notes From Our Eurozone Call - 1


Cliff Notes From Our Eurozone Call - 2

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.





Today, Daryl Jones (DOR), Keith McCullough (CEO), and Josh Steiner (Managing Director - Financials) teamed up to deliver an insightful and hopefully prescient presentation on the emerging European banking crisis. More than just a timely update to our Sovereign Debt Dichotomy theme, we take a deep dive into the European financial sector's liabilities and counterparty risk from a bottom-up perspective. Moreover, we walk through six probable scenario analyses for crisis resolution, in addition to providing our updated risk management views on several key asset classes.


To listen to the replay podcast of this call, please copy/paste the following link into the URL of your browser:



To download the presentation slides, please click on the following link:



As always, we're available to follow up with you should you have any questions. Please email or sales@hedgeye.com with inquiries.



In 1993, the Maastricht Treaty established the European Union and the path towards a monetary union and common currency in Europe.


On this path, the euro was launched in 1999 and has been a particular catalyst for criticism. Most notably, Nobel Laureate Milton Friedman stated in 1999 that he did not believe the euro would last ten years.


In contrast to Friedman's prognostication, the euro has lasted more than ten years, but just barely. In fact, many global markets are currently implying that Europe's monetary union and common currency are on the precipice of collapse.


Today Thursday, September 22nd, 2011, Hedgeye will be hosting a conference call to discuss the future of the Eurozone and the implications for global markets. The call will focus specifically on three topics: 

  1. Review of the history and structure of the Eurozone
  2. Assessment of the current situation and imminent risks and opportunities
  3. Analysis of potential and realistic scenarios to solve the crisis in Europe 

Please contact if you have any questions.  



The Macro Team

NKE: Pre-Print Thoughts

Here’s our view on NKE into the quarter. While we have them coming in above consensus, it matters little to our positive longer-term TREND call on the name. Here’s a small excerpt from our Nike Black Book showing our TRADE duration:


TRADE: We like Nike's earnings into the quarter -- though in today's tape, we're not quite sure if that matters.  We’re modeling $1.30 vs. the Street at $1.21. We’re somewhat aggressive on the gross margin line with a decline of -250bps relative to guidance of -300bps (and the Street at -290bps) as we think that Nike’s inventory is particularly clean at retail, and pricing strategies have gotten off to a good start at retail.  Also, we have Demand Creation down 8% vs. last year as Nike anniversaries the remnants of World Cup, and saves its Demand Creation dollars for the back half of the year. We’re likely looking at another quarter of heavy inventory investment – as seen over the past two quarters. But then starting in the November quarter, we start to see increasingly easy comps on the balance sheet (and subsequently the margin line on the P&L).


NKE: Pre-Print Thoughts - NKE SIGMA 9 21 11


Our call on Nike goes far beyond the quarter…


We think that investors are underestimating both the depth and duration that Nike’s recent infrastructure investments will have on financial results. It is one of the few companies that fits within our three different durations – TRADE (3 weeks or less), TREND (3 months or more) and TAIL (3 years or less). We like it at current levels, and think that there is upside to earnings in the coming quarter, the remainder of the May 12 year, and throughout the next three years. If Nike puts a lid on guidance on Thursday, as its biorhythm so often leads it to do with 1Q earnings, then we think it will be a great shot to get involved.


True, with a current EBITDA multiple of 10x our F12 estimates, Nike might not look like the cheapest name out there. But we think that earnings and cash flow expectations are too low across all durations, and that Nike has such a commanding lead right now in a global duopoly backed by the tools to sustain it. Combine that with a bullet proof balance sheet and what we think is a permanent structural advantage in sourcing product in a strengthening Yuan climate and this story has some serious legs to stand on.


We issued our first Nike Black Book on March 1stof last year, as we thought that the multi-year restructuring at Nike would start a reacceleration in sales, earnings, and returns. We think that played out pretty well over the ensuing year. While the stock has continued to outperform on the margin, there’s definitely been more concern creeping back into the consensus as to the sustainability of business trends, reliance on a so-called ‘sneaker cycle,’ and the direction of earnings growth in a global economic climate that most would agree is treacherous at best.


Why? People tend to focus on ‘comping the comp’ with futures – as they do most retail growth metrics. For your average company – one that gets lucky on a trend, a specific business initiative, or the economy – that’s a fair thing to keep in mind. 


While we can’t completely ignore that with Nike, we need to respect its proactive approach to creating its own destiny, and it’s proven track record of a) investing capital in new business initiatives and taking share, b) realizing when it’s time to change its organization in order to adapt to a changing marketplace, and c) making the right changes to facilitate its next leg of growth – even if unpopular with shorter-term investors.


While its investments have been well telegraphed, the results have not. Yes, we’ve seen an acceleration in futures trends, but the depth, breadth and duration of the company’s product and distribution pipe is still far from understood (by Wall Street and competitors alike).


The company was in what we’ll call ‘restructuring mode’ for the better part of two years. If you look at Nike historically, you’ll see that its payback vs. restructuring was 2-3x as measured by time. Similarly, cash on cash returns on incremental capital averaged better than 20%.


There’s no reason why this won’t hold true this time around, and in fact should generate return on assets starting with a 3. which suggests to us that Nike will, in fact, add another $7-$8Bn in revenue over the next 3-4 years.


This is not just blind faith on our part. We’re already seeing it in several areas – including three critical areas we outlined in our last Black Book that needed to be addressed, a) Apparel, b) Retail, and c) Women. This represents a critical power base inside the company that is just starting what we think will be a continued key driver to Nike’s business over time.


For more information on our Nike Black Book, please contact , or call to request access.

WMT: TREND line break. Selling.


Keith sold WMT in the Hedgeye Virtual Portfolio managing Macro market risk with the intermediate-term TREND line of support broken shortly after the open.


As it relates to the stock, if you believe, like we do, that the ‘trade down’ theme for the consumer is still very much alive and likely to accelerate, then WMT is one of the best places to look within retail.


Longer-term (TAIL) we definitely like Target here better. 


WMT: TREND line break. Selling.  - WMT VP 9 21 11



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20 Proprietary Risk Ranges

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