While Europe is busy bailing itself out of a mounting pile of sovereign debt, it appears its citizens are flocking to stores for the latest fashions. Trend line sales at fashion retailer H&M are trending down in the U.S., but throughout nearly all of Europe, there’s significant improvement. Europeans want to give H&M their hard-earned money and the company will gladly allow them to do so. This chart put together by the Hedgeye Retail team that we’ve illustrated here provides insight into the growth that lies ahead in Europe.







Claims Are Steadily, Predictably Moving Higher

Initial Claims rose by 1k to 387k, As usual, the prior weeks print was upwardly revised by 3k. Incorporating this 3k upward revision to the prior week's data, claims were lower by 2k. Rolling claims also increased, rising 3.5k to 386k, a new YTD high. For reference, the last time rolling claims were higher was December 10, 2011 at 388k. On a non-seasonally adjusted basis, claims fell 17k to 360k.


Fundamental Deterioration on Top of Seasonal Distortion

Rolling NSA claims, our way of cutting through the seasonal distortions taking place in the data, were better this week by 8% YoY, which is less good than the 10% and 9% YoY rates of improvement we've seen over the last few months, suggesting that beyond the seasonal distortions there is some fundamental softening taking place as well.   
















Operation Twist Extended

The 2-10 spread widened 5 bps versus last week to 134 bps as of yesterday.  The ten-year bond yield increased 6 bps to 165 bps. While there was some relief this week, if spreads continue to sit a these low levels, the 3Q12 sequential change will rival what we saw in 3Q11 when banks across the board saw their margins flatten. The extension of Operation Twist yesterday will continue to put pressure on the long end of the curve.






Financial Subsector Performance

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






Joshua Steiner, CFA


Robert Belsky


Having trouble viewing the charts in this email?  Please click the link at the bottom of the note to view in your browser. 


In preparation for CCL's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary


  • "We have...recently seen some positive trends in our European business so we are hopeful that booking patterns will return to normal levels sooner than we might have originally expected."
  • FY 2012
    • Mid-point EPS guidance: $1.55
    • NCC (excluding fuel) per ALBD: flat versus the prior year
    • "As to the current status of bookings, on a fleet wide basis –  excluding Costa – occupancies for the remaining three quarters are lower than a year ago at slightly higher prices."
      • "For North American brands, occupancies were slightly lower at slightly higher prices and for EAA brands occupancies are lower at higher prices again."
    • "Costa is forecasting a loss for the year of approximately $100 million or a swing of $500 million from its previous earnings forecast."
  • Higher airfares between North America and Europe have been a challenge
  • "Our U.K. brands are holding up relatively well as compared to our Continental European brands. We have recently seen ...improving trends in Germany so we're hopeful that we have finally turned the corner there."
  • 2Q 2012 (ex-Costa)
    • "Fleet-wide capacity for the second quarter is up 2.7%, 2.9% for North America brands and 2.2% for EAA brands."
    • "On a fleet wide basis, pricing is slightly higher than a year ago at slightly lower occupancy versus last year."
    • "North American brand fleet wide pricing is higher than a year ago at flat occupancies. North American brands are 56% in the Caribbean, approximately the same as last year with the balance in various other itineraries. Caribbean pricing is nicely higher than a year ago at approximately the same occupancy levels as last year. Pricing for all other itineraries taken together is higher than a year ago at slightly lower occupancy." 
    • "EAA brand fleet wide pricing is slightly lower than a year ago on lower occupancy. EAA brands are 50% in Europe, slightly up from 47% last year with the balance in various other itineraries. EAA brand European pricing is up slightly versus a year ago on lower occupancies. EAA pricing on all other itineraries taken together is lower than last year also with lower occupancies."
    • "On an overall basis, we are currently forecasting that constant dollar revenue yields will be flat to down slightly for the second quarter, slightly higher in North America, slightly lower for EAA."
    • 2Q midpoint EPS: $0.07
  • 3Q 2012 (ex-Costa)
    • "Capacity is expected to be up in the 2.9% range, 3.4% in North America, 2.2% in EAA. On a fleet wide basis, third quarter pricing is higher than a year ago on lower occupancies. North American brand pricing is slightly higher than a year ago at lower occupancies."
    • "North American brand capacity in the third quarter is 38% in the Caribbean, slightly higher than a year ago, 24% in Alaska, the same, slightly higher and 25% in Europe, which is about the same as last year. Pricing for Caribbean itineraries is higher than a year ago with pricing for Alaska and Europe cruises flat with last year. Occupancies for the Caribbean and Alaska cruises are slightly lower versus last year and occupancies for Europe cruises are lower than last year."
    • "For EAA brands pricing is nicely higher than a year ago at lower occupancy. EAA brand capacity is 85% in Europe itineraries, which is slightly up from 82% in the prior year. EAA brand constant dollar pricing for European and all other itineraries is higher than a year ago on lower occupancies."
  • 4Q 2012 (ex-Costa)
    • "Fleet wide capacity in the fourth quarter is expected to be 2.9% higher than last year, 3.7% for North American brands, 1.7% for EAA brands.  Fleet wide pricing is slightly higher than a year ago at lower occupancies."
    • "North American brand pricing in the fourth quarter is flat versus last year at lower occupancies. North American brands are 43% in the Caribbean slightly higher than a year ago, 13% in Europe, which is about the same as the past year with the balance in various other itineraries. Caribbean pricing is higher than a year ago at higher occupancies. Europe pricing is also higher versus last year at lower occupancies and pricing for all other itineraries taken together is higher than a year ago on lower occupancies." 
    • "EAA pricing, where EAA brands are 61% in European itineraries is nicely higher versus the year ago at lower occupancies."
  • "The close-in patterns are good, which is not necessarily always good for us, we like to see further out booking patterns. And I think that's going to start to happen. As business gets stronger closer in, then bookings get pushed out and pricing becomes more sustainable."
  • "For Holland America, Princess and even Seaborne, they're doing fine except for these European cruises and they are doing all they can to try to shore that up right now. But Alaska seems to be okay, their Caribbean programs are fine, all their other long-term programs are fine."
  • "The major markets for Costa will be Germany, Italy..., France and Spain. We're seeing evidence in France and Spain, actually of their business coming back already, less so in Italy and Germany. But we need Italy and Germany – Italy for sure."
  • "I think 2013 should – obviously show an improvement over 2012. But it may take a year or two to get back to the kind of profitability that we expected to have in 2012."
  • [Including Costa] "Total capacity we're up 3.7% in the first quarter, 2.7% second, 2.9% third, 2.9% fourth, and 3.0% for the full-year."
  • [AIDA] "I think they're starting to see business come back. But there will be some level of hit because... in order to fill close-in, they've had to take pricing down a little bit."
  • "Excluding Costa, we probably had about 1.5 point of yield increase on the onboard side in the December guidance. First quarter came in much more than we had anticipated and so we did build in a little bit of an increase in those numbers for the remainder of the year. So we are seeing some good onboard spend increases. All of the categories are up, all the major categories including casino in the first quarter."
  • "I think Alaska has been pretty consistent and solid. I mean people doing more Alaska cruises than Europe cruises because of the cost of the Europe cruises going up, but Alaska seems to be doing okay."

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"We must also stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability."

–John Williams


Who is John Williams?


That’s a question that would most definitely make Atlas shrug. Not to be confused with all-American pianist and composer John Towner Williams (Star Wars, ET, Sunday Night Football, etc.), this is the lackey Williams who runs the San Francisco Fed alongside his Vice Chair of American Economic Central Planning and Economic Cycle Smoothing, Janet Yellen.


Both of these charlatans were out in full force yesterday ramping up expectations for more of what has not worked – Policies To Inflate commodity and asset prices (Qe). So, thanks to who I am sure your Founding Fathers foresaw as being the leaders of your centrally planned market life, today’s risk management question is will he (Bernanke) or will he not deliver the drugs?


Back to the Global Macro Grind..


So far, my real-time market signals are actually telling me the answer to the question is no. That doesn’t mean the market has it right this morning. But someone always knows something – and, sadly, that’s actually the game that both Bush and Obama have signed off on in this country for the last 12 years – the game within the game.


I work on the inside of the game. But I don’t have the inside information itself. I deal with some of the most sophisticated and accomplished investors in the game. I don’t deal with Washington’s academic elite and/or those with political power. My job is to boil it down to the truth and be right. In the end, from a market pricing perspective, truth trumps storytelling.


The truth is that Janet Yellen might be even worse than Ben Bernanke from a forecasting perspective. That’s saying something. She’s been on the Fed’s Board of Governors since 1994! That makes her very special. Never mind the Housing bubble, she’s overseen a hat trick of Fed sponsored bubbles: Tech, Housing, and now Commodities.


Back to what Bernanke will or will not do today…  


Bernanke, of course, is not politicized, but today’s Joint Economic Committee meeting has been completely politicized. He is supposed to be delivering an accountable explanation as to why his economic forecasts are wrong at least 2/3 of the time. Instead, Yellen is pressuring him to whisper sweet nothings about Quantitative Easing.


To review, the Fed’s Congressional mandate is twofold:

  1. Full Employment
  2. Price Stability

Instead, their perpetual Big Government Interventions in our markets are delivering:

  1. Shortened Economic Cycles
  2. Amplified Market Volatilities

Boom, bust. Boooom, bust. Then, kaboooom!


That last part is what we have been making a call on since launching our Q2 Macro Themes of Fed Fighting (The Last War) and Bernanke’s Bubbles (Commodities). Janet Yellen 3 for 3, baby – Tech, bust; Housing, bust; Commodities ka-booom!


I “stand ready” to present 35 slides today in Dallas, Texas (at The Money Show) on why Commodity Bubbles in oil and food in particular are going to continue to pop as the Fed’s broken promises continue to fail.


There is a massive movement in this country towards arresting doing more of what has not worked. And, if you all need a Canadian and his American family to stand on the front lines of this policy making war, get me a red-white-and-blue jersey (and helmet) – I’m already there.


Before I go, I’ll leave you with the real-time signals that are suggesting Bernanke may not deliver on hope today:

  1. Chinese Equities closed down -0.7% (ahead of their rate cut, which implies growth is really slowing)
  2. European Equities are up but failing at their most immediate-term TRADE lines of resistance (DAX, CAC, and IBEX)
  3. Oil prices are down
  4. Gold is down
  5. Copper is down
  6. US Dollar is barely down

The only thing that’s complicated about analyzing all of this at this point is how Bernanke is going to attempt to explain it.


Stand Ready for another Qe. This man is fighting for his political life (Romney says he will fire him). If Bernanke goes there, he’ll put his short-term political career risk ahead of the country’s long-term risk management position. Qe3 will cause Dollar Debauchery. Oil will rise again, and real (inflation adjusted) US, Chinese, and European growth will slow further.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1596-1646, $95.77-102.97, $82.11-82.65, $1.22-1.25, and 1283-1335, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Stand Ready? - Chart of the Day


Stand Ready? - Virtual Portfolio


"Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible."

- John Maynard Keynes


That’s a quote from Chapter 12 of Keynes’ General Theory, “The State of Long-Term Expectation.”  Much of Keynes’ work was marginalized by the economists that were influential shortly after him – namely John Hicks – particularly the existence and importance of uncertainty in investment.  As a result, what is today considered Keyensian Economics is hardly the economics of Keynes (Steve Keen, 2011).  Hyman Minsky – the preeminent economist on fragility in financial markets – wrote in 1975 that, “Keynes without uncertainty is something like Hamlet without the Prince.”


This Early Look is not on Keynes – you’re welcome – but on uncertainty and oil prices.


As an energy analyst, I read a lot about oil markets.  One of the latest topics #trending on the subject is the price of oil approaching the marginal cost (MC) of production; this one always seems to get popular when oil prices drop precipitously, as it’s a go-to reason to ‘buy-de-dip,’ say the perma-bulls.


The MC of production is the change in total cost that comes from producing one additional unit of a good – a bicycle, a bushel of corn, a barrel of oil.  It is an important economic concept that determines the price of that good for a given level of demand.  On a long enough duration, the price of oil will converge around the MC because should price fall below the MC, the MC producers will not put incremental capital to work to arrest natural production declines, leading to a shortage and rising prices; and should price rise above the MC, it incentivizes production above what is demanded, leading to a surplus and falling prices.


Yes, MC matters, and yes, oil prices will track it over the long-term.  But the idea that the MC of oil production, and with it the oil price, is permanently headed higher – a popular opinion – is a fallacy.  Consensus is comfortable, and after a decade-long rise in the MC from $25/bbl in 2001 to $90/bbl in 2011 why would the next ten years be any different?  But the future is, of course, unknowable, and to deal with that inherent uncertainty “the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations” (Keynes, 1937).  In other words, only after oil prices have increased 15% p.a. since 2001 does a deflating oil price seem implausible. 


In general, though, commodities – even non-renewables (fossil fuels) – do not tend to hold their real value over the long-term, proving poor investments.  New technologies, greater efficiency in extraction and production, and the substitution of one commodity for another (at one time our primary fuel was wood, then it was coal, today it is oil) drive the MC of production lower, and with it real prices.  After adjusting for inflation, major industrial commodity prices fell 80% between 1845 and 2002, though regained some of that lost ground over the last decade in a fantastic commodities bull market (The Economist, 2011).   Only gold and oil have held their value in real terms, and, indeed, oil has been a spectacular investment over the last decade, gaining 300%.  It is easy to forget, though, that the real price of oil in 2000 was no higher than it was in 1950.


We can point to a number of reasons why the MC of oil supply and the nominal price of oil have meaningfully outpaced inflation over the last decade, though easy money and China’s incredible investment boom top our list.  Others point to the decline in easily accessible oil reserves and rising social costs of Middle East nations, but we see less validity in those theses.  New technologies and greater efficiencies can counter harder-to-reach reserves; and oil exporters’ government budgets are pro-cyclical. 


In fact, most costs are pro-cyclical.  The relationship between the MC of oil production and the oil price is a classic example of mutual causality.  Is the price of oil higher because rig rates, steel pipe prices, production taxes, and labor costs are higher?  Or is it that rig rates, steel pipe prices, taxes, and wages are increasing because the oil price is?  Both occur simultaneously and as a result, the MC of oil production is just as much a moving target as the price is – not some Rock of Gibraltar level of support.


We’ve seen this movie before.  In constant dollars (year 2000) the price of US coal decreased from $31.40/short ton to $16.84/short ton between 1950 and 2003; in other words, after adjusting for inflation, coal prices have fallen more than 1% p.a. since 1950.  This trend is due to a decline in the MC, or “marked shifts in coal production to regions with high levels of productivity, the exit of less productive mines, and productivity improvements in each region resulting from improved technology, better planning and management, and improved labor relations” (Edward J. Flynn, 2000).  Those trends persist today, and the high cost coal producers are gasping for air (pull up a 5Y chart of PCX or JRCC).


And of course, we have US natural gas, which has fallen in nominal terms from $12/Mcf in 2008 to $2.50/Mcf today in a stunning display of how technology and innovation can lower the marginal cost and price of a fossil fuel.  Visions of permanently high natural gas prices prompted a build-out of LNG import facilities in the mid 2000’s.  Alan Greenspan (clearly an expert on the subject!) said in 2003 that, “high gas prices projected in the American distant futures market have made us a potential very large importer.”  With impeccable timing, Cheniere’s Sabine Pass received its first cargo of imported gas in April 2008, and now that same visionary company will spend $6.5B to export gas by 2017 (nat gas bottom?).  And this wasn’t the first time the gas bulls were fooled.  After years of rising natural gas prices in the 1970’s, four major LNG receiving terminals were constructed only to see gas prices peak in 1983 and decline for the next 15 years; three of those plants were eventually mothballed.


Is the rapid increase of the MC of oil production and oil prices any more “secular” than it was for natural gas in the 2000’s?  Will Chinese demand for commodities grow at the same pace over the next ten years as it did for the last ten?  What would sustained US dollar strength do to commodity prices, oil in particular? 


The confidence one can have in answering such questions is limited, perhaps even “negligible” (Keynes), but few in this Game accept that.  It’s funny – you don’t often hear investors or analysts say, “I don’t know,” but when consensus is proven really wrong, the all-too-common excuse is, “How could I have seen this coming?”


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $91.20-96.79, $81.21-82.02, $1.24-1.27, and 1, respectively.


Kevin Kaiser



CRUDE QUESTIONS - oil v usd 20



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