We’re seeing the already wide gap between Hanes and Fruit of the Loom pricing widen, as prices for FOTL come off by 30% inside KSS. We still think that pricing integrity will be tough to come by.
We’ve been very closely monitoring the pricing spread at retail for Hanes vs. Fruit of the Loom since it became more of a concern for us six months ago. We’ve gotta hand it to HBI, as they have maintained a consistent pricing premium to Fruit of the Loom in all major channels. But we’ve been floored to see a 40% price gap between the two on the same exact product at KSS vs. JCP. In other words, Kohl’s sold that same exact product as JCP, but advertized at a 40% higher price.
Now, we see the pricing dynamics change again. But not as we’d think. KSS has reduced its Fruit of the Loom Pricing to $11.99 from $17.99 for 5 pack crew t shirts, boxer briefs & a-shirts while Hanes' pricing is unchanged for the same pack size. As a result, the Hanes to Fruit of the Loom premium on crew necks has increased from 89% to 184% while the premium in boxer briefs is now 113% from 42% in April.
Fruit of the Loom has clearly been impacted by the EDLP battle between KSS and JCP, while Hanes’ pricing has remained seemingly unchanged.
Our view is that this closely mirrors the consensus view, and company guidance. HBI needs pricing integrity in 2H to hit earnings. As gaps like this widen, we think that pricing integrity dynamics can change quickly.
Positions in Europe: Short Spain (EWP); Short EUR/USD (FXE); Long German Bunds (BUNL)
“We’re building it up, to break it back down.”
-Linkin Park, “Break it Down”
TRADING VIEW: Spain’s €100B “credit line” to recapitalize its banks may bid the broader equity market higher over the short run; however, we see significant headwinds for Spanish growth ahead, including another 30% leg down for housing and property values, further credit ratings downgrades on the sovereign and banks, and the inability of PM Rajoy to reduce the country’s 8.9% deficit (as % of GDP) as the country’s debt expands alongside this newest loan.
It’s worth pointing out the market’s message from today’s results: The IBEX35 gave back all of its morning pop, and closed down -0.52%; the EUR/USD has traded flat to down intraday at $1.2492, the S&P500 is down slightly, and 5YR CDS for Spain and Italy have risen considerably since this morning: Spain gained 16bps to 595bps, just short of an all-time high of 604bps recorded on 6/5! And Italy rose from 533bps to 554bps intraday. How about that for some confidence in Spain!
On Spain’s Cracked Credibility:
While the headline number may prevent a full-on Spanish crash, we think there are numerous headwinds ahead for Spain, the sovereign, and its banks. The major one stems from a lack of credibility that PM Rajoy can follow through on his fiscal consolidation targets, in particular to materially budge the public deficit off 8.9% of GDP.
We see numerous risks to growth, with signals including:
- Bombed out PMI Services and Manufacturing numbers (both around 42 = major contraction).
- Housing and Property values that have another 30% to fall.
- Further credit ratings downgrades on the sovereign and banks.
- Rising debt levels (68% of GDP in 2011) as the future credit line, funneled through the FROB, adds to the debt.
On the banking side our Financials sector head Josh Steiner points out:
- To put things in perspective, a €100bn bailout to Spain’s banking system is the per capita equivalent of providing $875bn to the US banking system, which is roughly 25% larger than TARP.
- Expectations are that the infusion will rank senior to existing creditors, which means there will ultimately be a PSI-style loss taken by existing creditors.
- This may calm systemic fears around counterparty risk and breakup of the Euro in the short-term, but individual holders of Italian, French and even German bank debt should find this far from comforting, as unfavorable resolution protocols are being established.
- This may ultimately put more pressure on the banking system, not less, as banks find fewer willing non-governmental sources of funding.
Shape of the Loans?
- The bailout plan is short on details, a draft really. It’s not clear if funds will come from the EFSF, ESM, or both. Remember, the ESM has yet to come online, expected for July, and in its current state does not have the directive to fund bank recapitalization/bailouts.
- The proposed loan is expected to carry an interest rate of 3%.
---We were frankly surprised by the timing of Saturday’s announcement that the EMU is prepared to lend up to €100 Billion to recapitalize trouble Spanish banks. Why?
- We expected a bailout to be named after the IMF’s review of the recapitalization needs (expected today) and the results of two independent audits from Wyman and Berger (expected by June 21).
- We expected Eurocrats (led by Chancellor Merkel) to wait on a decision before the results of the Greek election to send a signal to the Greeks that a certain level of austerity is required to remain in the Eurozone and that Brussels will not simply write blank checks.
- Risk signals have not elevated to extreme levels over recent days: Week-on-week (as of Friday) Spanish bank CDS actually came in and the 10YR Spanish bond has held relatively stable in a range of 6-6.30%.
So why did the loan hit Saturday?
- We think Europeans were greatly pressured by Geithner and more largely the Obama administration to inflect the bearish headlines to help Obama’s reelection chances. This position was likely made clear during the finance chiefs G7 conference call on Spain last week. We also view the IMF’s Lagarde positioning for direct IMF loans to Eurozone countries, a position that goes against the original charter. No other facts point to why a loan had to be presented over the weekend.
What are the implications for the Greek election on 17. June?
- We’re assigning an equal probability that sentiment from this bank bailout adds positive support (messaging) for the pro-austerity New Democracy and the anti-austerity Syriza.
- New Democracy may position that Greece cannot “survive” without the help from Troika, and therefore must do everything to remain in the Eurozone.
- Syriza may position the bailout demonstrates that the Greeks have called the Eurocrats’ bluff, namely that austerity is conditional to stay in the Union.
- By law we will see no election opinion polls heading into Sunday’s vote. We still expect a victory by a coalition of New Democracy, however Saturday’s bailout news simply puts one more hitch in this highly uncertain and close election.
“We’re building it up, to break it back down”
This weekend’s actions prove yet again how committed Eurocrats are to keeping the Eurozone project alive, without having a credible roadmap to do so. In short, we expect more “bailout band-aids” ahead as politicians refuse to let sovereigns or their banks fail. We expect risk, as we’ve seen over the last two years, to ping-pong around Europe. Is Italy next?
We’re highly aware that we cannot get in front of Eurocrat actions –witness this weekend – its critical to signal just how strong the resolve of Eurocrats is to keep their jobs. We’ll continue to monitor for any signs of a third LTRO, the re-engagement of the Securities Market Program, or any other non-standard measures that could have significant implication for markets.
However, our fear is that the backbone of the Eurozone is so compromised that despite all that is being built up to support these countries, the Union is doomed to fail. Here we’ll caveat the statement by saying that a fiscal Union alongside the existing monetary Union is a necessary must, however such a transition will be trying given the cultural resolve not to give up fiscal sovereignty to Brussels.
If market expectations continue to be set for a solution yesterday, we expect much disappointment ahead, and a very long road if Europe can shore up the imbalances across its weaker members to find a productive path forward.
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- The average age of a cruiser has fallen significantly since 1986 and has hovered between 46 and 52 the last few years
- The aging of the population means that a higher % of the population is approaching the core cruiser age
- Among cruisers, the largest age segment remains +60s but, unlike casino demographics, the younger generations are cruising
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
* Spanish bank bailout expectations prompted across-the-board tightening for EU peripheral countries, EU banks and US global and credit-sensitive banks.
* On the other side of the trade, Germany's swaps widened (the only country in the EU to show this) as did swaps of US insurers, as expectations for low rates persisting longer than previously expected rose.
* Spanish bank bailout euphoria also rippled across junk bonds, leveraged loans and munis, with both indices showing improvement week-over-week.
If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.
European Financials CDS Monitor – French banks, still the canary in the coal mine, showed the biggest WoW improvement in swaps. Across Europe last week, 37 of the 39 reference entities we track showed spreads tighten. The median tightening was 4.7% (16 bps).
Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread held flat at 40 bps.
ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis. The latest overnight reading is €788.22B.
Security Market Program – For the thirteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 6/8, to take the total program to €212 Billion.
What’s in a bailout? Who cares – it doesn’t even matter anymore. Central planning has become the de facto catalyst in the markets. Everyone is hoping and praying for Bernanke to reload his clip and destroy the dollar despite being out of bullets, according to Hedgeye CEO Keith McCullough. No wonder Hank Paulson is busy puking in garbage cans; this bailout business is enough to make anyone sick to his stomach.
Hedgeye Financials Sector Head Josh Steiner noted an interesting point earlier today, which is that the IMF has $750 billion in “commitments.” What’s in a commitment? $100 billion from the U.S., $100 billion from Japan and $178 billion from the EU, to be exact. When the collateral call comes (and it will), will these countries actually be able to step up to the plate? Time will tell.
Growth IS slowing. China at least will admit to that. July 17th’s GDP report will be yet another data point that’s hard to swallow. But for now, all eyes are on Europe and it’s something not to be taken lightly.
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