Looking for Fear?

We don’t get the media’s freak-out over Ireland over the last two days, but agree that the increase in investor fear is a natural consequence of Standard & Poor’s cutting the country’s credit rating one step to AA-. In its report, S&P increased its estimate for recapitalizing the banking system to as much as €50 Billion ($63 billion) from a previous estimate of €35 Billion. In summary, we believe that more pain could be ahead for the island nation.


From a fundamental perspective we’ve yet to see meaningful improvement from the country over the last months. Despite improvement in quarter-over-quarter GDP to +2.3% in Q2, Ireland has the highest budget deficit in Europe at 14.3% of GDP; unemployment at 13.7%; and banking and housing issues that loom, including news that the Bank of Scotland has decided to pull out of Ireland in the new year, which could negatively impact the hotel sector in particular. And further data shows that its important tourism industry is suffering. According to the Central Statistical Office Ireland, the number of overseas visitors to Ireland between January and May in 2010 stood at 2,026,100, down from 2,951,800 in the same period in 2008, or the equivalent to a drop of 6,130 visitors per day.


In context, Ireland’s economy is ~ 1/15 the size Germany’s; we’re nevertheless mindful of the impact that the periphery (PIIGS) can have on the region.  Below we chart increases in the risk premium via sovereign bond yields and CDS prices over recent days from the PIIGS, while the economies of Germany, France and the UK remain front and center on our screens as a greater gauge of the region’s health. Importantly, over recent days we’ve seen the TREND line (3 months or more) in the DAX and FTSE break, decidedly negative factors in our model, and an initial signal of the trouble ahead that we’re forecasting for Europe in the back half of the year. Our TREND lines for the DAX and FTSE are 6075 and 5293, respectively.


Further, the initial data out in August has largely been in line with our forecast for a negative inflection in August:

  • Germany’s ZEW confidence survey showed a material decline in economic sentiment to 14 in August versus 21.2 in July
  • Manufacturing and Service PMI numbers largely slid for Germany, France and the Eurozone
  • The German IFO Business climate survey for expectations 6 month ahead declined, from 105.6 in July to 105.2 in August

As a reminder, we believe the legacy of European sovereign debt is by no means rear-view, including the question of bank exposure to sovereign debt, which was largely unaccounted for in the 91 bank stress test. Further, continued fiscal and political weakness throughout the region should persist (in Greece and Hungary in particular).


Tomorrow Ireland will issue between 400-600 Million Euros of bills. This is but one immediate term hurdle to keep your eye on.


Matthew Hedrick



Looking for Fear? - mh1


Looking for Fear? - mh2

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more