Gong Show In Tokyo!

Takeaway: Japan is just 2.5% away from falling into full-blown crash mode.

Asia is looking worse and worse by the day. China and Hong Kong were both down over 1% overnight.


Chalk it up to an ugly China exports number which was up 7%, rather than 14%. (For the record, they are making up the number. Hedgeye Macro Analyst Darius Dale was all over this a month ago.) In a nutshell, they’re making up fake invoices and last month’s number was massively inflated. Incidentally, Bloomberg wrote about it this morning: “China Export Gains Seen Halved With Fake-Data Crackdown.” It’s refreshing to see people finally acknowledging this fraudulence.


At the bottom of the Asian barrelJapan. Get this: the Weimar Nikkei is now bearish both Trade and Trend in our quantitative risk management model. Japan is within walking distance - 2.5% - of falling into full-blown crash mode, which would be a 20% peak-to-trough decline. None of this come as any real surprise to people who don’t subscribe to Japan’s Sapporo-eyed, Keynesian Kool-Aid experiment.


Krugman? Yes, Krugman is surprised.


Gong Show In Tokyo! - Nikkei Gong Show

Oversold: SP500 Levels, Refreshed

Takeaway: It didn’t take people long to get really bearish again, because consensus has been bearish for the last 6 months.



It didn’t take people long to get really bearish again, because consensus has been bearish for the last 6 months. Once again, the market is immediate-term TRADE oversold within a bullish intermediate-term TREND.


As both the consumption data (ISM Services PMI, New Orders, Housing, etc) and employment data (jobless claims 347,000) surprise to the bullish side, who would have thought that #GrowthAccelerating would become the latest fear? At least with Cyprus things were actually burning.


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


  1. Immediate-term TRADE resistance 1624, then 1673
  2. Immediate-term TRADE oversold < 1601
  3. Intermediate-term TREND support = 1577


In other words, we snapped one of my front-runner lines (immediate-term TRADE support of 1624) and the machines chased. This isn’t new. Neither is front-month vitality (VIX) pinning another 6-month lower-high.


This is what happens when hedge fund performance is bad and consensus is forced to cover high and short low.




Keith R. McCullough
Chief Executive Officer


Oversold: SP500 Levels, Refreshed - SPX



Pricing survey suggests weaker RCL pricing 



The concentration of recent cruise ship issues has begun to impact RCL.  During our recent pricing survey, we saw pricing deterioration, particularly with the Celebrity and RC brands. This is a sharp downward shift from more optimistic trends seen in April and May, when RCL seemed to have weathered Carnival’s troubles relatively well.  The high end of RCL’s 2013 net yield guidance of +2-4% looks very aggressive if the pricing weakness continues into the summer months. CCL brands, with the exception of Costa, actually experienced stable pricing since its revised guidance on May 20.  Could CCL yield expectations finally be reasonable?  We would likely need another month of data to answer that. 


The cruise industry continues to deal with a litany of problems in 2013 e.g. fires, operational failures, norovirus, and government-related issues.  While the number of incidents at sea is on par with past years, scrutiny from the media has been heightened this year because of the seriousness of some of these issues.  The latest incidents are the Royal Caribbean Grandeur of the Seas fire (May 27), two Celebrity Xpedition itinerary cancellations to the Galapagos due to violations of local law (May 31), and operational problems aboard  the newly revitalized Carnival Sunshine that led to a cancellation. (June 1).  Moreover, historic flooding in Eastern Europe is a downer in an already weak macro environment.


Here is what we’re seeing from our proprietary pricing survey for early June in Europe and North America.  We analyze YoY trends, as well as relative trends, which are determined by pricing compared to the last earnings/guidance date for a cruise operator i.e. RCL: 4/25, CCL: 5/20, NCLH: 5/6.




Based on our survey, RCL overall pricing lost a couple of % points in pricing relative to May.  RC brand F3Q pricing in June was only marginally higher YoY in Europe, down from mid-single digit growth in May.  F4Q RC pricing remains lower YoY .  Celebrity pricing also took a hit in F3Q and F4Q while Pullmantour pricing was steady.  European capacity accounts for 25% of total capacity in F4Q.


Costa F3Q pricing has deteriorated moderately in the last two weeks.  However, Costa’s FQ4 pricing remains strong at low double digit growth. Princess, Cunard, Holland F3Q pricing are lower YoY but the trend is stable to slightly higher. AIDA 3Q pricing also stabilized in June. Generally, F4Q pricing is looking better than F3Q, but the trend is worsening.


Norwegian’s European very close-in F2Q pricing is particularly weak.  F3Q and F1Q 2014 pricing hasn’t moved much since May.






The Caribbean accounts for roughly 34%, 23% and 29% of Carnival’s total itineraries for F2Q, F3Q, and F4Q.  In June, Carnival brand pricing bounced back for F3Q, although lower YoY pricing continues to be in the high single digits.  Pricing trend for F4Q and F1Q 2014 was consistent with that of two weeks ago.


RC brand pricing for F3Q is now declining in the mid-single digits, a sharp reversal from the mid-single digit growth seen in May.  F4Q pricing is also moderately lower compared with slightly lower pricing in May.  A similar trend is emerging for very early F1Q 2014 pricing. 


Celebrity’s pricing trend is stable for F4Q but lower for F1Q 2014.


Norwegian's Caribbean pricing is as stable as it can get.  Breakaway and Getaway pricing for Jan 2014 has not moved since April. 



The biggest disappointment was premium pricing in Alaska.  Holland America and Celebrity continue to discount heavily to fill up cabins.  On the brighter side, RC brand pricing is nicely higher.   



Carnival’s pricing struggles in Mexico remain for F3Q, with pricing down 15% YoY, partially due to hard comps.  F4Q and F1Q pricing are both slightly higher.  Pricing trend is positive for all three periods.

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Takeaway: On a seasonally-adjusted basis, the labor market is showing signs of cooling off. This is the same illusion that's been there for 3 years.

Below is the breakdown of this morning's claims data from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact .



Labor Market: Divergences Finally Becoming Apparent

The funny thing about economic data series is that the inflection breaks often aren't apparent until well after the fact, i.e. 20-20 hindsight. That's why its important to spot things early and try and understand a) why they're happening and b) the implications. 


With that in mind, the divergence between the SA and NSA initial claims data is finally beginning to become apparent. As the first chart below shows, the seasonally-adjusted data is now almost flat in the March to present time period (the purple hatched line is almost level). This is an inflection from the August 2012-February 2013 environment of notable negative slope (steadily improving claims). The inflection is expected as it is following the same trend over the past three years, owing to faulty seasonal adjustment factors in the government's model. It's important because the market still cues off the SA data, so, to the market's eye, the data is beginning to stagnate.


In the second chart we show the NSA data, which continues to improve at a well-above trend rate. Note the negative slope in the black line vs. the positive slopes in the previous years' lines. In this case, negative is good, because it depicts accelerating improvement.


To the extent the recent sell-off continues, likely on the back of the Fed-in-a-box narrative (good news = bad, bad news = bad), we think this labor market data makes it clear that investors should be buying red, but doing so with the understanding that the labor data will continue to appear to deteriorate through August (3 more months) before again beginning to turn positive.








The Data

Prior to revision, initial jobless claims fell 8k to 346k from 354k WoW, as the prior week's number was revised up by 3k to 357k.


The headline (unrevised) number shows claims were lower by 11k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.5k WoW to 352.5k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -6.6% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.9%












Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT


Morning Reads From Our Research Team

Takeaway: A quick look at some articles on the Hedgeye radar screen.

Todd Jordan - Gaming, Lodging & Leisure

Lawyer Trashes Las Vegas Luxury Suite 'Hangover' Style (via Las Vegas Review-Journal)


Keith McCullough CEO

China Export Gains Seen Halved With Fake-Data Crackdown (via Bloomberg)

India Boosts Gold Import Tax to Curb Record Deficit, Demand (via Bloomberg)

North and South Korea Agree to First Dialogue in Years  (via New York Times)


Daryl Jones – Macro

Defending 15,000 (via The Reformed Broker)

Thursday: Weekly Unemployment Claims, Flow of Funds Report (via Calculated Risk)


Rory Green – Restaurants

The Recession Really Hurt Dinner Visits (via Restaurant Finance Monitor)

Restaurants can expect beef prices to keep rising (via Nation’s Restaurant News)


Josh Steiner – Financials

As Investors Bail Out, SAC Shows a Brave Face (via New York Times)

S.E.C. Proposes Changes in Money Funds (via New York Times)


Tom Tobin – Healthcare

U.S. Physicians Reveals Downward Trend In Profitability For The Year Ahead, With Healthcare Reform Fueling Top Operational Challenges (via Virtualization Journal)


Brian McGough – Retail

Apparel and Footwear Imports Rebound In April (via Sourcing Journal)

Jos. A. Bank Emerges as Bidder for Lucky Brand (via WWD)


Morning Reads From Our Research Team - reading


Regional recovery? Not yet



"Consistent with other regional gaming companies, the quarter presented a difficult operating environment in our markets, as the combination of continuing economic challenges, changes in payroll tax rates and the delay in income tax refunds led to softer business levels at our casinos.  In addition, when compared to the extremely mild winter in fiscal 2012, there was significant impact from weather-related disruptions in the fiscal 2013 quarter.  Finally, the fourth quarter of fiscal 2012 contained an extra 14th week compared to 13 weeks in this year's quarter.  Adjusting for the extra week in fiscal 2012 and last year's insurance recoveries, we believe our results were in-line with other regional casino operators."


-ISLE CEO Virginia McDowell 




  • Continues to invest marketing dollars to Cape Girardeau 
  • Cape Girardeau ramp slower than expected 
  • Boonville casino floor renovations will be completed in June
  • Debt: $1.16 billion; ($155MM outstanding on revolver; Senior 5 7/8% Notes: $350MM; Senior Notes 7.75%: $300MM; Subnotes $350MM; $4MM other debt


  • Slight uptick in spend per visit from rated players; overall visitation was down (flat-to-slightly down visitation for rated players)
  • Other than Bettendorf project, not much in terms of large scale developments
  • Bank line: $150MM drawn on $300MM revolver; $90MM excess capacity; covenant leverage: 6.4%-6.5%
  • If you take out extra week impact, results still lower YoY
  • Wouldn't buy back stock until leverage goes to 5x
  • No comments on selling company
  • Drew customers from Caruthersville due to increased marketing spend at Cape G.  But will rationalize that spend going forward.
  • More conservative on insurance costs going forward 
  • Houston market remains underpenetrated
  • Weather impact: Davenport closed for 8 days due to flooding
  • Mississippi: cashed $9.5MM in tax refund checks last year; this year, it was <$7.5MM
  • Philly casino: at most, capital investment would be $25MM
    • Expect a decision by regulatory authority by the end of the year
  • SSS April was down 4-5% across regional markets; overall regional trends pretty steady
  • May trends: no change in consumer behavior or patterns

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