CAT: The Slowing Continues

It’s worth noting that with Caterpillar (CAT) management offering lower guidance for 2013 recently, the stock has dropped -28% since late February when we first initiated our #EarningsSlowing call. Look around the market and you’ll see a lot of other companies that look like CAT. The slowdown in earnings across all sectors is one of our big macro themes and it’s certainly more relevant than ever at this point.


CAT: The Slowing Continues  - CAT


Strong recent stock performance and a still risky near-term environment, as evidenced by our recent pricing survey, leaves us on the sideline.



Despite a 6.5% increase in bunker fuel prices since their guidance on July 20, RCL should report in-line 3Q results Thursday due to better cost management.  RCL has had six straight quarters of better than expected expenses ex fuel, and that streak should continue.  2012  guidance should be intact but F4Q may be lowered slightly due to continued pricing weakness in North America (i.e. Caribbean) and higher fuel prices.  But investors may not care much about this fiscal year as all ears will be on Fiscal 2013 commentary.  Bookings continue to be solid and will likely improve in 2013.  F1Q 2013 is a difficult comp as yields were up 7% last year with much of the business booked before the Costa Concordia incident.  We’re seeing slightly higher Caribbean pricing YoY for 1H 2013, though it is losing steam recently.  69% and 37% of capacity is in the Caribbean for 1Q 2013 and 2Q 2013, respectively.  Meanwhile, the recovery in European pricing has been steady.     


Here are some other conclusions from our cruise pricing survey completed last week.  The charts below track pricing trends on a relative basis—i.e. prices relative to that seen on the last earnings call (RCL - July 20).


F4Q 2012

  • Discounting on some last minute booking remains in the Caribbean.  Celebrity pricing remains robust but the trend is slacking.
  • Asia-Australia pricing continues to outperform as pricing trends have improved during the last two months

F1Q 2013

  • Caribbean:  pricing is flattish for RCL branded ships while modestly higher for Celebrity brands.  Trend-wise, RCL brands slipped in prices from September to October while Celebrity brands improved slightly. 

F2Q 2013

  • European pricing continues to move higher across all brands
  • Pricing in the Caribbean is flattish and the trend is worsening
  • Alaska pricing hasn’t fluctuated much

Trading at more than 13x forward earnings, valuation is roughly in-line with its 20-year average.  2012 provided a difficult operating environment because of the European recession, increases in bunker prices, and costly incidents on the water.  We believe 2013 could be another tricky year with difficult comps early in the year and the resiliency of the North America market will be tested again particularly with low GDP growth.  The jury is still out on how RCL will handle the higher capacity in the Carribean in 2013.  Europe may recover but the question is how much and how fast.  While we are optimistic on RCL in the long-term on favorable demographics, low market capacity growth, and continued improvements on the cost side, we think it’s better to stay on the sidelines given the near-term risks and fair valuation.


RCL: EYES ON 2013 - RCL888


RCL: EYES ON 2013 - RCL1


RCL: EYES ON 2013 - RCL2


RCL: EYES ON 2013 - RCL3


Positive Notes For US Banks

With many US large cap financials reporting earnings last week, reactions were essentially mixed for those participating in the stock market. However, the credit markets were delighted with earnings seeing them as a positive across the board. Credit default swaps tightened across the entire US financials complex, meaning that investors are less concerned with counterparty risk associated with the big banks like Citigroup (C), Goldman Sachs (GS) and Bank of America (BAC).



Positive Notes For US Banks  - BAC CDS



The positive notes in the credit market extended outside the US to Europe as well. The idea here is that financials have an embedded discount around counterparty risk and that investors in the stock market will soon play catch up to their peers in the credit market. In the intermediate-term side of things, be sure to keep an eye on the banks.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Priced In? SP500 Levels, Refreshed

Takeaway: To be, or not to be, priced in – remains the question.

POSITIONS: Short Industrials (XLI)


To be, or not to be, priced in – remains the question.


I don’t think the economy (#GrowthSlowing in Q1/Q2 or #EarningsSlowing here in Q3/Q4) has been priced into the stock market all year. But that’s just me. Some people think the Fed has had nothing to do with the stock market not being the economy. Right.


Finally, the storytelling is hitting a fork in the road. The economy is colliding with both sectors and stocks (one at a time), and now we’re hearing the pundits who missed calling growth and earnings slowing to begin with say “it’s priced in.” Right, right.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1442
  2. Intermediate-term TREND support = 1419


In other words, if and when fundamentals matter (they did Friday), there’s no reason why we shouldn’t test my 1419 line. Will that be this week, next, or in November? I don’t know. But the probability of that occurring is rising, not falling.


While some may forget the corporate margin cycle topping in Q3 of 2007, few will forget the SP500 was down -4.4% in November of 2007.  When the stock market was up “double digits YTD” in October 2007, a few things apparently weren’t priced in.


Keep your head on a swivel out there. Risk happens fast.




Keith R. McCullough
Chief Executive Officer


Priced In? SP500 Levels, Refreshed - SPX

VFC: Exhausted Revisions

V.F. Corporation (VFC) put up a decent quarter, beating on the EPS line but missing top-line due to weakness in Europe and a slowdown in The North Face brand. While the company’s SIGMA looks good, EPS revisions are exhausted and trending negatively for the company. If you're unfamiliar with VFC, they own a portfolio of popular brands including Timberland, The North Face, Nautica and Seven For All Mankind.



VFC: Exhausted Revisions - 10 22 2012 9 44 39 AM



After a five-year streak of upwards revisions of an average of 5-6% for FY12 on the print, VFC guided roughly in-line for the second quarter in a row. EPS have been the main factor where bears have gotten this stock wrong.  With increased spending to support growth, and continued challenges in key businesses, it’s tough to bank on real EPS upside aside from better FX rates. That’s not exactly a multiple enhancer.


We like VFC, but would begin to lighten our load here and use discretion when getting involved with the name. 

Healthcare: Analyzing The Data

Looking at our custom HRM Indices, you can see the relative performance for the S&P 500 versus Medicare Exposure and Domestic Revenue. It appears that consensus moves lower for 2012 and 2013 were too aggressive and explain the bounce off the June lows as you can see in the chart.


A few other important themes worth noting here include:

  • Results are coming in weaker across companies particularly those with exposure to Europe.
  • Regarding our Physician Utilization theme, and a 2H12 recovery, the theme appears delayed but intact, the important point to keep in mind is that Q3 reports reflect softness we saw across our datasets through the summer.
  • Medicare outperformance remains, but has been the biggest relative loser over the last few weeks, coinciding with Romney’s election odds rising.
  • Healthcare has been a relative outperformer into broader market declines, but the current set up is neutral.
  • Beat-Miss:  2Q12 was the ugliest quarter in aggregate for reported topline growth vs. consensus since 1Q09 for both Healthcare and SPX constituent companies. The beat-miss ratio for 3Q12 is currently running ~40%/60% for the broader market.  Given the significant & expedited drawdown in estimates post 2Q12, missing or barely beating conservative & already deflated estimates is not a particularly bullish growth signal.

Healthcare: Analyzing The Data  - image003


Healthcare: Analyzing The Data  - image009


Healthcare: Analyzing The Data  - XLV

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