Wednesday, July 24, 2013

Europe. Are you long?

Back to Europe

Growth - European PMI data this morning was good across the board and Italian retail sales outperformed too. It looks as though the crashing fighter pilot of European growth has started to pull up and is skimming the treetops having managed to avoid disaster. Which is nice for us.  

Unity - Germany's data was strong but it is worth considering the disparative impact a China slowdown would have on Europe. Germany, the great supplier of capital goods and modern machine tools is most likely to feel the cool breeze ahead of other Euro nations (barring Italian high end fashion). Which leads TMM to see another benefit to Europe overall. Recent German data has already pointed to an increase in intra-European trade and a further decline in external Asian demand will continue to flatten out the economic differences between Germany and the peripherals that in the past have resulted in the stresses within  policy unity. So basically, Germany getting "Edward the Seconded" (see glossary) by China/Asia demand is good news for European policy unity and should encourage relative longs of Peripheral equities over German stalwarts.

Positioning - OK, hands up if you are long Eur/usd. You are? Well we think you are pretty lonely out there. Despite a drop in Usd longs against a pick up of Euro longs in some reports we see, the trend we detect is that most still want to be long Usd (well they are raising rates aren't they? And look at their growth!) and short Europe (they have to cut rates next or at least stay on hold for eternity don't they?). The rallies in the likes of Eur/Usd (and Aud/Usd for that matter) have so far been met with "sell the rally, great opportunity to buy more USDs". Which reinforces TMM's belief that few have the upside trade on.  We noted a couple of posts back that historically US rate rise environments of the past in have actually seen USD fall in the following months, now whilst the circumstances are indeed different this time, that fact is another barb in the complacent "long usd" meme.

Meanwhile in the US, it's nearly August so that must mean we are approaching Debt Ceiling silly season again and it looks as though the Republicans are lining up a  "Monty Python Black Knight" scene with their proposed budget cuts. It may well be noise but it is another road bump in the path of dollar strength.

So TMM are beginning to think that if European policy makers can maintain the summer STFU policy so well used in 2010, Eur/Usd could be set for one of those up moves that "shouldn't have happened"

However there is one other place that TMM fancy being long Euro -  Against gold. The retracement in gold higher has seen the monstrous short positioning level out and as we still don't see a compelling macro story for it, we are looking to reshort. Hearing scare stories of physical demand emptying vaults (Hero Zedge having gone into desperate, even for them, overdrive recently) fits a nice psychological profile that upside is now expected/discounted. India increasing restrictions on imports on Monday is just another weight on its progress.

We hereby brace ourselves for the gold trolls in the comments section. Tin Hats. 


Anonymous said...

C Says
As I am about to return from my third Spanish trip of the last year it's pertinent that you ask are you "long".
I cannot speak for an economy I know too little about. I can however say that it's property market and thus broadly it's banking sector are in my opinion all things Japanese. I sincerely believe that the supply/demand and pricing levels for an entire generation are unlikely to "recover". This has all the hallmarks of long run illiquidity stamped all over it.
It is recovering like the man who fell off a very tall cliff and half way down he found a small root to cling to.
I look around and simply ask where will the fundamentals for buyers come from? I can see how from a very low base a few cash buyers will sniff around and give rise to the usual Industry speak "it's picking up', but frankly this isn't about a few second home buyers with cash to spend. The wider issue is where does the rising income come from to meet prices that are still far too high and with far too many homes still abundantly in supply.
At street level these people do not look to my experienced eye equipped to afford current levels.

Polemic said...

Judging by C s comment and no others and no recycling of this post, i take it there appears to be little agreement. Perhaps that adds to our "no one's got it on" feeling.

amplitudeinthehouse said...

Coming into the week I had two original ideas reversed and stopped me out, the other drop off the it's back and I'm not losing it again..the last of the originals :)

Leftback said...

Yes, TMM. We like this EURUSD call. We like it a lot.

Not only are conditions in much of Europe not cataclysmic, but they are not getting any worse in Spain and Greece. There are also political factors to consider in Europe and the US. Notably, Germany will make hawkish noises, while Obama and the US Congress will likely try to retrench on some of the so-called sequester.

As Mangler looks ahead to the September elections in Germany (this year's most important political event), she is unlikely to be in the mood to be a benefactor to Southern Europe, so she will have Schäuble (US financial media people, insert your awful pronunciations here) out and about saying very hawkish things, and she will be sitting on her beloved Dr Aghi to prevent him from acting until she is re-elected, at which point the pair will re-enact their Alpine idyll in Südtirol and get down to some serious easin' of Mangler's fiscal elastic ..... but until then don't be surprised to see EURUSD drift higher.

Anonymous said...

Ramapagingruss says:

I have been long EUR for ages - bascially against every commodity currency I can find. Over the medium term I have found current accounts and inflation rates tend to tell you where currencies should trade - and both point to stronger EUR. Also given the closing in teh WTI-Brent recently, one od the big advanted to the US has just disappeared. Long EUR looks good. Whether this will be good for euro equities - I am not so sure....

abee crombie said...

Thanks for the insights C. I have heard that the property market in Spain looks interesting (barcelona) but always good to hear other opinions. I know some PE shops are sniffing there. I like the bigger spanish banks as long as asset quality doesnt continually disappoint. Large intl franchises trading cheap. But you have to worry about spanish asset quality, which is better in the big banks than cajas

As for EURUSD I liked it before at 1.28, here I think its ranged bound. massive rebound in periphery current account deficits recently

Leftback said...

BBVA and SAN are Spanish in the same way as C is American. Apart from being TBTF, they do a huge amount of business in Latin America and elsewhere in Europe. I like them, but I wouldn't touch the smaller regionals, the cajas, with yours, mate.

Banco Espirito Santo in Portugal is an interesting one, as well, having been hit hard by Brazil as well as Portugal, there isn't much left to go wrong. Earnings report Friday.

OIH, XHB and IWM all obligingly down today, along with the MORT. Interest rate sensitive robots.

abee crombie said...

and there goes EM. HYG. Long rates etc

Gnome of Zurich said...

I have been very long the PIGS for a few months: Spanish banks, Italian banks and media companies, Greek banks, you name it. And I like it more and more.

It is the only investment where I am getting these odd reactions from other professionals somewhere between total disbelief and derision. Got this the last time in gold around 2002 or so. However the fundamentals may turn out, it's certainly not a crowded trade, so the potential payoff should be good.

Leftback said...

I have had SAN and BBVA, Intesa, the Greek phone company OTE, PT, Telefonica and all kinds of other assorted European detritus ever since the panic lows last summer, which I then assumed were the analogue of US March 2009 and bought into with a 5 year time horizon and full body Kevlar protection.

Most of these knife catching adventures have already been profitable, but there are always a few dogs, KPN being the ugly mutt in my case. Most of my mistakes were in the "safe" countries. Long PIGS!!!

Not much bounce in the homies today. This looks like the whole "stronger dollar" complex at work today. Usually these are not one day moves.

Anonymous said...

C Says
"BBVA and SAN are Spanish in the same way as C is American".
Exactly, my comment really applies to the banking sector that is domestically oriented to a greater degree than the former.
And the EUR I don't have an opinion on either.

Arguably property in Barclona might have some of the appeal that differentiates say London from the rest of the UK albeit without the currency 'cheap' factor to help it along.

Charles Butler said...

It's been a while, hasn't it.


Not to say you're mistaken about Spanish RE, but I'm not sure you've got it right, either.

What's punk are prices, but demand is fairly strong and sales are consequently totally flat for the past two years. Trailing 12-mth is around 330,000 units. The many local pundits that predicted a collapse in volumes following year end tax changes were, in a word, wrong.

There's lots more to it. But I'm not going to write a comment box thesis on it - unless you encourage me, of course.

Anonymous said...

Go on, son. Have it!

Polemic said...

Hi Charles, as our resident man on the ground out there I would be delighted if you were to write something about it. Either here, or if you are doing fuller update on your own blog, (I'll recommend it as Charles is too modest) we would happily ref and link to it.

Anonymous said...

C Says
Go to it Charles, but you lost me at "demand is fairly strong and sales are consequently totally flat for the past two years".

A man once told me "nothing is sold until it is paid for". Along the way I broadened that out in a variety of ways. One such might be ,I can't really talk about demand without sales. Ergo "flat sales" is different from flat demand how?
I suspect you might mean "prices are punk" means anything can sell if you price it right and certainly pricing it right can change the demand function. Trouble is if what I have been seeing in Immobiliari windows is typical then pricing it right has hardly begun. Appears to me to get that priced right is going to cause a world of pain to banks. That's really the point I was making with the "japan" comment. Appears to me they are doing the same thing all over again in the sense of not enough want to mark to market and take the loss.
Spain certainly isn't the US in the way they have gone about trying to clear the market which why I think it will be along time in resolving it has a major fiscal drag.
For clarity, my major interest from 1972 culminating in 2007 was property and there really isn't much that is new that I have not seen at least a few times before.
I don't have a crystal ball ,but I do know to make headway you have to clear the market from previous cycles and Spain looks nowhere near doing that.

Charles Butler said...

That's bribery, Pollie. TMM has never linked to anyone that wasn't Monty Python. [You're on]

Gnome of Zurich said...

I am long BBVA, Atresmedia, Mapfre and BME in Spain; Intesa, Unicredit, Mediaset and Gtech in Italy and Piräus Bank, Alpha Bank, Opap and Hellenic Exchanges in Greece. I gave up on the telecoms because of the ongoing free cashflow squeeze and high debt loads.

The recapitalised greek banks may be worth a look for TMM, they now have 10% true equity ratios (not the risk weighted fantasy stuff) and already declared more than 30% of their loans as non-performing and have provisioned against them. No meaningful amount of government bonds left in their balance sheets. I really think they are a lot safer than "safe-country" Canadian, Swiss, Nordic or Australian banks these days, all with real estate bubbles...

From a risk/reward perspective, the stock exchange companies BME and Hellenic Exchanges are probably the safest proxies on the PIGS. Solid balance sheets and generating free cashflow even at the bottom of the cycle.

abee crombie said...

Since my only experiences in Spain were drunken nights on Las Ramblas or in Ibiza, please do not hesitate to correct, but from my understanding of the Spanish RE problem, there was a massive over building in the rural areas, smaller cities with new communities projects galore. But in the major cities and in the core it seems that prices are on the cheap. Of course location, location.

Some banks (cajas, Sareb now) might be holding the unfinished communities in the middle of no where on their books for too much. That is potential for zombie banks. Similar but not the same as Japanese banks eating losses from valuing RE in tokyo at $10,000 a sq foot or whatever ridiculous prices were seen there.

Any comments?

Blackstone has agreed to buy a group of apartments from the city of Madrid for EU125.5MM in what is the co’s first property deal in Spain. “We believe strongly in a recovery of the Spanish economy” --Bloomberg

Leftback said...

Interesting morning. REITs holding up quite well, even as the XHB takes a pounding and rates drift higher. Looks as though that sector has bottomed out. As a bonus this morning, we were specifically short PHM, so that was luvlee. We are out of all that now, but still looking for some more downside in OIH and perhaps even in the invincible IWM, before we close up for the weekend. Having any kind of position tomorrow seems a bit daft, Fridays in Summer being what they are...

One wonders how many ETFs will need to be liquidated on Cummings Point Rd in the next few weeks. It's hard to see that not affecting markets in the short term.

Anonymous said...

Oh LB we have been talking ourselves out of short IWM for some time now, but the temptation, the temptation ...

Leftback said...

Nice summary here from Adam Johnson at BBG of the Europe v US econ data picture, visiting many of the issues we discussed here recently:

Citigroup Surprise Indices

Leftback said...

A Stevie ConMan Quiz:

1) When does the SAC unwind start? (It's started)
2) How much leverage have they got? (~3x ?)
3) What do they own? (Mainly US small crap, obviously)
4) Who else is in the same trades? (Other momos)
5) Anyone else fancy 5yTs, IWM puts, TLT calls today?

Charles Butler said...

abee crombie,

Most interesting that Blackstone has bought rental units. That's a business that few locals would dare enter.

WellRed said...

Better question LB: when does the Paulson gold trade unwind? Does anyone else actually own the precious metals complex these days? I guess them and one local shop that has been long since, well 2000.

Long ride down.