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Bucked Up!

“I feel quite bucked up!”

-George F. Kennan


I’m half way through reading John Lewis Gaddis’ biography of this great American strategist’s life. The aforementioned quote came from Kennan in 1947 (Gaddis, pg 242). He was 43 years old at the time and was just coming off one of the biggest wins of his career – shifting US foreign policy towards Russia in what is well known by historians now as “The Long Telegram.”


Kennan’s character resonates with me because he was quite a moody fellow. He was authentic. He thought for himself and didn’t particularly care about what people thought about him. While he didn’t make as many mistakes as I have at his age, he was still very introspective about his research process. He never stopped questioning himself or his premise.


Whether you are a strategist, athlete, or professional in any other field where performance is measurable in real-time, you get it. Performance is fleeting. As a result, conventional wisdom suggests you should always err on the side of caution when things are going well. I disagree with that. Confidence is contagious. Seize it when you have it. Make as much progress as you can.


Back to the Global Macro Grind


As the SP500 was holding all-time highs into yesterday’s close, I was feeling rather bucked up myself. It is, after all, all about #StrongDollar. When the US Dollar Index was basing in mid-November (at $79-80), that was our signal. We’ve seen higher (all-time) lows in the Dollar and lower-highs in Commodity prices ever since.


There’s measurable entropy in something that’s rising off a 40yr low (USD hit an all-time low in 2011 when Commodities (CRB Index) hit an all-time high). It’s critical to contextualize the asymmetry associated with that entropy. Remember, long-term bottoms are processes, not points. By the time everyone and their brother is bucked up on #StrongDollar, we’ll be getting out of the way.


The good news (if you are Long Dollars, Short Commodities, and Long US Consumption stocks) is that we are still in the early innings of what could be a long telegram of Early Look notes anchoring on this fundamental point. So, please – I beg you to be patient with both our thesis and the American recovery in confidence, birth rates, and household formation. It’s all born out of the same thing.


What’s up since the US Dollar gave us the green light (quant signal) in November 2012?

  1. SP500 is +20% now (vs 1353 on November 15th, 2012)
  2. Weimar Nikkei is +65% (vs 8661 on November 15th, 2012)

Yep, Bernanke spent the 1st half-decade of his reign as USA’s Central Planner In Chief (2007-2012) Burning The Buck. Ever since his epic “print to infinity and beyond” moment (SEP 2012 FOMC meeting), the Japanese dudes have taken the torch.


Everything in currency markets is relative. On the margin, former BOJ Chief (Shirakawa) was actually the most hawkish of the Big 3 Central Currency Commanders going back to 2006. That’s what most guys who got squeezed being short Yens to 40yr highs in 2011-2012 had wrong. To get the timing right in big currency moves, you need to get the relative policy shifts right.


Again, this is just how we roll. So if our GIP (Growth, Inflation, Policy) framework sounds a little foreign to some, that’s cool too. Don’t forget that we did the unthinkable here and thought for ourselves in building our models and macro strategies this way.


Back to 1-month CTRL+SQUEEZE move in everything Global Equities this morning…


Here are 3 big things jumping out of my notebook:


1.   CHINA – just as it looked like Chinese stocks were going to hell in a hand basket again, China joins the party printing a +14.7% Export print for April; it’s not just the US data that has accelerated sequentially m/m – most of the Asian and European data stopped slowing in March too; Shanghai Comp +4 days in a row, back above 2206 TREND support to 2246


2.   COMMODITIES – SP500 +0.5% yesterday w/ the CRB Index deflating -0.4% (-2.4% YTD); #CommodityDeflation remains the outlier call of 2013; it is bullish for inflation adjusted consumption growth (particularly US #GrowthAccelerating). Will Oil start to look like Gold does next? Prices at the pump falling Q2 vs Q1 for the first time in 4 years


3.   SP500 – 1 is not where you want to be chasing US stocks; you have -1.4% of immediate-term downside to my 1st line of support (1599); that said, higher-lows and higher all-time highs in my model are what you want to be net long of, unless you have a bearish catalyst


As I have been asking my sparring partners Doug Kass and Dennis Gartman since January, what is your bearish catalyst? Will it be a reversal of last week’s raging bull catalyst (US Jobless Claims dropping to 324,000, a 5 year low)? Since we’ve ripped for 4 consecutive up days since that data point, I wouldn’t be surprised if we sold off on it being less great this week (Thursday).


Who knows? And, if it’s legal, what is it they know? All I know is that the more I read about history and repeatable market strategies, the less I know altogether. The only thing I am 100% certain about is that I will be getting something very wrong soon. That’s just the game. In the meantime, I’ll play it confidently. That’s the only way to win.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Shanghai Composite, and the SP500 are now $1, $99.36-106.11, $81.87-92.98, 98.25-99.98, 1.71-1.82%, 12.36-14.51, 2169-2265, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bucked Up! - Chart of the Day


Bucked Up! - Virtual Portfolio


The Macau Metro Monitor, May 8, 2013




According to Angela Leong, some of the casinos and slot parlours operated under the licence of SJM Holdings will likely fail the air quality checks on smoking areas again.  Leong admitted “having no confidence” that the air quality in the smoking areas of those venues would meet the standards.  She said that the ventilation systems in most casinos operated under SJM’s licence are old.


A second check on the casinos that had failed to meet the requirements in the first test will be carried out “in due course”, the government has said.

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As the tide slowly turns around, Carnival may be left behind



CCL investors will have to continue to wait for a definitive inflection point in Europe.   Royal and Norwegian has kept yield guidance unchanged.  Moreover, our monthly pricing survey suggests that CCL pricing remains under pressure.  Aggressive promotions by Carnival indicates that to fill capacity, it needs to offer dirt cheap prices to potential cruisers.  Carnival needs to repair its image worldwide—a tall task at a hefty price.  


As the summer season revs up, a barrage of promotional deals should be hitting your inbox if you've shown a tiny bit of interest on going on a cruise.  While we’ve seen some usual promotions post Wave Season, one recent promotion was particularly striking.  Princess, one of Carnival’s premium cruise lines, announced a special sale running from May 1-8, offering up to 50% off on more than 200 cruise itineraries throughout Europe and Alaska in addition to an onboard credit ranging from $25-$100.  This Princess sale is not only early for Alaska (they did something similar for June last year) but it shows Carnival’s aggressive price discounting strategy to desperately fill up cabins in the critical FQ3 period.  


While the Carnival brands continue to cut prices in its effort to regain loyalty, we've seen the competition capitalize on CCL’s misfortunes.  Royal & Norwegian pricing and bookings are doing particularly well in the Caribbean and MSC Cruises recently saw its April UK bookings almost double due to a successful promotional strategy of its newest ship, the MSC Preziosa. 


Here is what we’re seeing from our proprietary pricing survey for May in Europe and North America.  We analyze YoY trends as well as relative trends, determined by pricing relative to those seen near the last earnings date for a cruise operator. 




RCL recently mentioned on its conference call even though Europe still was struggling, the market was performing better than its expectations in February.  Based on our survey, we saw that the RC brand pricing is improving YoY in Europe.  For FQ3, we estimate average pricing YoY for the RC brand has been trending higher in the mid-single digits in May, up from low single-digits in April.  NCL’s European pricing fell moderately for FQ2 on a relative basis but its FQ3 pricing gradually improved.  This is consistent with management's commentary on a very slow recovery in European pricing.


Carnival is lagging way behind.   With the exception of Costa and a handful of Cunard itineraries, Europe pricing for other Carnival brands (e.g. AIDA, Princess, Holland America) are lower for the rest of the year and the trend is worsening.  In addition, Costa’s +30% YoY price gains in March for FQ3 have shrunk to +15% in May; on the brighter side, FQ4 prices remain up 30% YoY .


As for Princess, YoY pricing has slipped into negative territory in May, falling in the mid to high single digits—a substantial decline in trend from April due to the aggressive promotion mentioned above. 


North America

We continue to believe Carnival’s biggest concern should be the Caribbean due to the multiple operational failures.  The Caribbean accounts for roughly 34%, 23% and 29% of Carnival’s total itineraries for F2Q, F3Q, and F4Q.  The Carnival brand pricing suffered a sharp decline sequentially (~10%) in May for F2Q, F3Q, and F4Q.  We also saw early F1Q 2014 pricing exhibiting weakness.


There was not much change in RCL’s pricing for the region.  It continues to be robust particularly in F2Q and F3Q.  Norwegian pricing picked up slightly in May.  This divergence suggests that Carnival continues to lose share to Royal and Norwegian in the Caribbean market.


Alaska may not be as strong as people expect in 2013.  Summer prices were discounted substantially in May across most brands.  It seems the discounting in Alaska is earlier than usual this time of year.  However, the expected record bookings should alleviate that.  Carnival is also struggling in Mexico for F2Q and F3Q due to hard comps as the pricing trend remains lower. 

JCP: 'Less Horrendous' = Positive on the Margin

Takeaway: Perma-bears will pounce on this ugly sales disclosure. We share LT concerns, but definitely view it as a 'less bad' event.

The way we see it, this JCP sales preannouncement is positive on the margin for the stock, although the perma-bears will attempt to argue otherwise.


By no means is a -16.6% sales comp good. In fact, it's pathetic given that JCP went up against an -18.8% in the same quarter last year. It suggests that the two-year comp eroded sequentially from -18.7% in 4Q to -24.7% in 1Q.


But the reality is that…

a) The company beat our expectation for a -20% comp decline. This is the first time in six quarters the company did not miss our estimate.  


b) JCP noted that over 500 stores were under construction -- something that is 100% valid. We all knew this headed into the quarter, but it was impossible to gage the precise impact on the comp. Could it have been -10%? Yes. -25%? Yes.  No one knew then, and no one knows now. It's pretty tough to drive comp when there are more workers swinging hammers than ringing cash registers.


c) As expected, Ullman threw Johnson under the bus -- again (the first time being with last week's  'mea culpa' ad campaign on YouTube). Simply put "this sales weakness is because of the old management's sales strategy -- and we're working on implementing a new sales strategy". People will give Ullman a pass.   The irony is that even if Johnson were still at JCP, sales would start to get sequentially better in the wake of the Home Department redesign. Nonetheless, Ullman will take the credit as things improve. We don't fault him for that as much as we do failed boardroom politics leading to Johnson getting sacked (we've been vocal about our view that Johnson shouldn’t have been fired -- at least not yet).


It's important  to note that the release said nothing about inventories or earnings -- and as we all know looking solely at sales, inventories or earnings without considering the other factors is very dangerous in retail. But given that this number was disclosed in connection with its term loan financing transaction, we'll assume that if inventories were overly bloated or gross margins were  decimated (ie on par with what we saw in 4Q), the company would have given at least some indication. Goldman would probably have made sure of that.


When all is said and done, this result is in line with our view that the wind is at JCP's back over the near-term.  That said, we can't comfortably get on board with the stock because we have absolutely no clue what the long-term strategy is here (or have faith that the correct strategy will be implemented). Under Johnson, we knew the plan -- even if it was a stretch -- but with Ullman, the best we can surmise is that it will return to being one of the most promotional department stores in the country -- but with a slightly better product offering.


JCP – bearish TAIL (21.48 resistance); bearish TREND (17.95 resistance)



Singapore’s gaming revenues declined 3% YoY in Q1 2013 to S$2BN as market hold was 2.32%, compared with 3.48% in Q1 2012.  Market hold since Q2 2010 (MBS opening) has been 2.87%.   If we use 2.87% to normalize VIP revenues in Q1 2013 and Q1 2012, GGR would have been S$2.25BN, up 20% YoY.   


Rolling chip volume growth hit 39% YoY in Q1 2013 to S$43.7BN (US$35.5BN), continuing the momentum from the 53% surge seen in Q4 2012.  By comparison, Macau RC volume in Q1 2013 grew only 4% YoY to US$220BN.




MBS gained 8% points QoQ in net gaming revenue share to 60.3%, a new high.  




Total property EBITDA experienced its 4th consecutive YoY decline to S$747 million, falling 24% YoY.  MBS’s EBITDA share jumped 14% points QoQ to 65.8%.




Mass revenue was up 5% YoY as hold reached 23.80% (hold in 1Q 2012 was 22.49%).  RWS gained 2% points QoQ in share to 52.4%.




Mass drop fell for the 3rd consecutive quarter YoY, declining 1% to S$2.75 BN. Market shares were roughly unchanged QoQ.  In general, Mass market drop has been range bound from S$2.5-$2.8 BN since 2Q 2010.




Slot win slipped 3% YoY to S$336 and slot win per slot per day fell 4% YoY to S$733.  RWS gained 1.8% QoQ in slot win share. 



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