Tape(r) Worms

This note was originally published at 8am on June 14, 2013 for Hedgeye subscribers.

“Shy and proud men are more liable to fall into the hands of parasites and creatures of low character.  For in the intimacies which are formed by shy men, they do not choose, they are chosen.”

-Henry Taylor


Tapeworm infestation is not something we would wish on our worst enemies.  According to Wikipedia, tapeworm infestation is the infection of the digestive tract by adult parasitic flatworms called cestodes or tapeworms.  Typically, consuming uncooked food is the way in which tapeworm larva find their way into humans.  Once inside the digestive tract, a larva can grow into a very large tapeworm.


No doubt waking up to read about tapeworms is the last thing you need.  Alas, we couldn’t think of a more appropriate analogy given the market’s recent fascination with the potential tapering of QE by the Federal Reserve.  Yesterday, the market actually rallied on this tapering rumor based on a blog by Jon Hilsenrath in the Wall Street Journal that tapering, if it is to occur, would be a more manageable version, perhaps something akin to Taper-lite.


We haven’t been stock market operators as long as many of you, but we certainly don’t remember a period in which there has been such a fascination with, and focus on, the next move of the Federal Reserve.  But until the market host rids itself of the QE parasite, this fascination and volatility associated with the next move of the Fed is likely to continue.


Back to the global macro grind . . .


Earlier this week, we reiterated our short call on emerging markets and China with a concise presentation by our Senior Asia Analyst Darius Dale. (Email to get a copy of the presentation.)  This short call has played out positively for us and has been backed by asset flows out of emerging markets funds.  In fact, in the most recent week the exodus from emerging market funds was $9 billion, which was the third largest weekly outflow ever (after March 2007 and January 2008).


The key new research we provided in the presentation was related to short Chinese financials.  We view this thesis as three fold:

  • Credit growth is slowing – The increasing likelihood that the People’s Bank of China tightens will provide an impediment to credit growth;
  • NIM compression is occurring – Based on the current NIM spread, we think this ratio can only tighten from current levels, which will pressure bank margins; and
  • Non-performing loans are rising – Even though the data is very opaque, NPLs of 20% are a reasonable estimate given by many experts.

In the Chart of the Day, we’ve highlighted one of the more insightful charts in the presentation, which is the Chinese 7-day repo rate monthly average, which highlights how tight money is in China currently.  This rate has gone from about 3.5% in May to 5.7% in June, which is the second highest monthly rate in the last five years and a staggering shift month-over-month.  If money sustainably tightens in China, economic growth will most certainly take a hit.


Our Senior Analyst covering Europe Matt Hedrick also gave a very lengthy and thoughtful update on Europe this week (once again email if you want to see this presentation).  While we don’t see the financial sector risks in Europe that we do in China, the economic outlook does remain largely bleak in Europe. Some of the key points that we highlighted in the presentation included:

  • Fundamentals in Europe remain challenged and we should expect long-term below mean growth;
  • We see limited risk to any country leaving the Eurozone or the Euro being disbanded, so another Cyprus flare-up is unlikely;
  • The bifurcation in Europe will continue and we are fundamentally bullish of Germany and the U.K. and fundamentally bearish of France, Italy and Spain; and
  • ECB is unlikely to shift policy anytime soon, which should continue to support our strong dollar call.

A structural issue that makes it inherently difficult for Europe to recover quickly is the inflexibility of the labor force.  In the United States, labor can flow freely from state to state based on employment opportunities.   So, in theory, the U.S. would be very unlikely to have states where the unemployment rate was north of 26%, such as in Spain and Greece, and other states where the unemployment rate is below 7%, such as Germany and Denmark.


Given the inability of labor to flow easily through European borders, due to differing qualification levels, work quotas and cultural barriers, it is no surprise then that a recession in Europe should be more protracted.  The bigger issue, of course, is that it creates unemployment hot spots, such as Greece, Cyprus, and Spain, that will have an inability to re-balance their economies, except over very lengthy time periods.


This dreary global growth outlook we have continues to push us back to the one economy and stock market we remain positive on – the U.S. of A.  On that front, as it relates to macro data coming out today, the big one is Michigan Consumer Confidence which is released at 9:55am to the masses, and five minutes early for those that pay up for the early look!  Regardless of who gets it ahead of you, it will still be a decent “tell” on how the consumer is feeling.


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1351-1418, $100.21-105.43, $80.26-80.24, 93.54-95.85, 2.07-2.27%, 15.21-1857, and 1605-1653, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Tape(r) Worms - Chart of the Day


Tape(r) Worms - Virtual Portfolio


TODAY’S S&P 500 SET-UP – June 28, 2013

As we look at today's setup for the S&P 500, the range is 63 points or 3.36% downside to 1559 and 0.55% upside to 1622.                             










  • YIELD CURVE: 2.11 from 2.12
  • VIX closed at 16.86 1 day percent change of -2.03%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8am: Fed’s Stein speaks on monetary policy in New York
  • 9am: NAPM-Milwaukee, June, est. 45.2 (prior 40.67)
  • 9:15am: Fed’s Lacker speaks in White Sulphur Springs, W. Va.
  • 9:45am: Chicago Purchasing Mgr, June, est. 55.0 (prior 58.7)
  • 9:55am: U. Mich Consumer Sentiment, June final, est. 83.0
  • 3:30pm: Fed’s Williams speaks in Sonoma, Calif.
  • 11am: Fed to buy $1.25b-$1.75b debt in 2036-2043 sector


    • House considers remaining amendments to, and passage of, Offshore Energy and Jobs bill
    • 9am: ITC judge releases findings in a patent-infringement case that InterDigital filed against Nokia, Huawei Technologies, and ZTE over 3rd generation wireless technology
    • 5pm: Canon could learn whether the ITC will issue a broad order blocking what the Japanese electronics company contends is a widespread copying of its toner cartridges


  • Nike 4Q profit tops ests. as U.S. sales gain
  • CBS billboard unit files for IPO as part of breakup with parent
  • Corzine faces trading ban as regulator sues in MF Global
  • BCE-Astral bid approved with conditions by Canada regulator
  • DOJ probes US Airways, American merger: Reuters
  • Icahn to wrap up $5.2b loan package for Dell: N.Y. Post
  • ABF teamster employees ratify 5-yr national labor agreement
  • PBOC’s Zhou maintains pledge to keep stability in mkts
  • BoE’s King retires in 2 days as Carney takes helm
  • German May retail sales beat ests. as eco. seen growing
  • Japan recovery strengthened in May in boost for Abe
  • U.S. Jobs, Egypt Protest, Croatia: Week Ahead June 29-July 6


    • Finish Line (FINL) 7am, $0.16
    • Blackberry (BB CN) 7am, $0.08 - Preview
    • Shaw Communications (SJR/B CN) 8:15am, C$0.45


  • Gold Trades Near 34-Month Low as Quarterly Slump May Spur Demand
  • Gold Traders Split as Rout Resumes in Bear Market: Commodities
  • JPMorgan Leads Storage Companies Cutting Back on LME Warehouses
  • Brent’s Best Forecasters Doubt Bulls After Slump: Energy Markets
  • Copper Advances After German Retail Sales; Aluminum Climbs
  • WTI Heads for Longest Gain Since April as Economies Strengthen
  • Rebar Rises for Second Day as China Plans Town Redevelopment
  • Gold’s Slump Fails to Excite Indian Shoppers After April Frenzy
  • Palm Oil Declines for Fifth Straight Quarter on Rising Supplies
  • U.S. Corn Output to Rise 25% Even as Acreage Drops: Rabobank
  • Gold’s Hold on Silver Is Strongest Since 1950: Chart of the Day
  • Anglo Said to Hire Banks for Sale of Stake in Biggest Project
  • Nicaragua Pursues a $40 Billion Canal It Can Call Its Own
  • India to Exceed China as World’s Coal Power, Buoying BHP: Energy






















The Hedgeye Macro Team











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.

Vacation Unchecked

“Be good or I’ll send you on a nightmare cruise.”

-A warning to children that is spreading fast among parents


It’s Friday and time to start planning your summer vacations, if you haven’t already.  What will it be? A gambling spree to Vegas or white-hot Macau? A trip to Six Flags, Disney World, a vacation resort, or an exotic country?  Or spending less than the price per night at an economy motel for an all-inclusive (minus the cost of getting your butt there) cruise trip to the Caribbean? Here are 5 reasons why our Gaming, Lodging, and Leisure team, led by Todd Jordan, thinks the last choice should be avoided:


1)      A slim but fat enough chance that you may be stranded out in open water with no food and malfunctioning bathroom facilities. 


a.      12-year old Allie Taylor, who was abroad the infamous Carnival Triumph (aka poop cruise) where an engine fire stranded the ship for four days, described the moment perfectly, "I just wanted to vomit, like every second probably."


b.      Number of people at Hedgeye who want to take a chance aboard a ‘hot port-o-potty’: zero. 


2)     ‘I’m on Fire’—not because the ships love playing classic Bruce Springsteen but because they love to catch on fire e.g. Carnival Triumph, Grandeur of the Seas (operated by Royal Caribbean), Pullmantur Zenith (operated by Royal Caribbean)


3)     Norovirus (stomach flu) spreads like wildfire.


4)     If you’re new to cruising, think about which cruise brand and ship you trust.  Given all the embarrassing ship incidents in 2011-2013, it’s not easy to find one. Stick with the other potential 1st time cruisers, who have been turning towards other forms of entertainment, such as amusement parks and vacation resorts.


5)     Are you willing to save some bucks for mind-blowing unpleasantness?


We became bearish on the cruise industry from a TREND perspective starting with Carnival Cruise Lines (CCL) shortly after the Triumph incident (02/10/13). While Wall Street 1.0 and travel agents initially brushed aside Triumph as just another event, not really comparable to Costa Concordia—the Carnival-operated ship that capsized off the western coast of Italy on 01/13/12—we viewed the incident as a serious Carnival brand killer.  We believed Carnival needed aggressive marketing spending and discounted prices to fill capacity; Carnival later confirmed this on its F2Q earnings report, as promotional spending guidance will pick up in the 2H of 2013.  (see our notes, CHART DU JOUR: CCL: IT COULD GET SMELLIER (02/14/13) and CCL: SINK OR SWIM (03/19/13) for more details.)  After two guidance cuts, mainly stemming from the Triumph incident, Carnival’s EPS and yield expectations for FY2013 are finally reachable, but the company admits it will be a slow recovery for the tarnished Carnival brand (2-3 years). 


With Carnival licking its many wounds, we think the next opportunity on the short side is with Royal Caribbean (RCL). While RCL picked up market share in the face of Carnival’s woes early in the year, its own recent troubles may pressure performance for the rest of the year.  Based on our mid-June proprietary pricing survey for ~13,000 itineraries, we’re seeing pricing weakness in the RC brand.  The RC brand accounts for 64% of RCL’s total capacity for 2013.  Part of the discounting was attributed to negative publicity surrounding the Grandeur of the Seas fire (05/27/13)—a RC brand—but the pricing trend has signaled further deterioration since early June.  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 e.g. RCL: 4/25.  Europe is particularly concerning for the RC brand in F3Q, as YoY pricing has turned negative, a sharp reversal from modest growth in May.  RC brand pricing is also struggling in the Caribbean, declining in the mid-single digits in mid-June, substantially lower than that seen in May.  So far, F4Q pricing is relatively unchanged relative to late April. 


Alaska is another region to keep an eye on.  While Alaska is bolstered by record bookings, it is still discouraging to see the Celebrity and RC brands significantly slash prices to fill cabins.


Thus, the tide may have shifted for Royal in June and the high end of its net yield guidance of +2-4% looks too aggressive if the pricing weakness continues into the summer months.  While Carnival mentioned on its F2Q conference call an improvement in the performance of its European fleet, it is mostly based on its Costa brand’s outperformance.  RCL doesn’t have Costa nor as easy comps in Europe as CCL, and we believe the challenging and competitive environment there will continue to prevail for some time.  As for North America, the Grandeur fire has muddied the visibility somewhat.  It remains to be seen whether RC brand pricing will recover in the coming weeks.  Royal Caribbean also has been hit with some recent isolated ship incidents, i.e. two Celebrity Xpedition itinerary cancellations to the Galapagos due to violations of local law and the Pullmantour Zenith fire. 


These cruise operators just can’t catch a break.  We shouldn’t take a break with them.


For additional information on the cruise pricing database, company models, or written research, please contact .


Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):


UST 10yr 2.43-2.74% (bullish)

SPX 1 (neutral)

Nikkei 128 (neutral)

USD 82.33-83.89 (bullish)

Yen 96.67-99.67 (bearish)

Gold 1178-1295 (bearish)


Enjoy the summer weather,


Felix Wang

Senior Analyst, Gaming, Lodging & Leisure


Vacation Unchecked - ww.chartday


Vacation Unchecked - ww. porto

NKE: Lower Guidance = Entry Point

Takeaway: Nike's 4Q print was spot-on with our expectations. It's executing as it should. If it sells-off on guidance we'd look for an entry point.

Nike's 4Q print was spot-on with our expectations. The company is executing as it should.  If it sells-off on guidance we'd look for an entry point.


The company delivered on the top line, and the combination of strong futures, pricing increases and a favorable event schedule suggests that FY14's top line looks good.  On top of that, gross margins are sequentially improving, inventories look good, and we have good visibility as to the timing of SG&A.


The downside (which we expected) is that the company backed off of its 'high end of mid-teens EPS growth' expectation to something in the 'low double digits'. The primary culprit was Japan, which showed a massive 23% spread between 6% C$ futures and -17% reported decline in the business.  This is all completely manageable in the context of the broader portfolio -- particularly given the portfolio continues to hum. The US continues to crush it, Europe -- both Western and Central -- is stabilizing, and China is finally comping against steep declines at this time last year. 


In all reality, Nike probably set a low bar with its earnings guidance. Our $3.10 for the year is about a dime above where the Street is likely to come in. The only thing that could stop Nike at this point is Nike. With its current management transition of no fewer than half a dozen senior roles, there will definitely be uncertainty in the organization. But aside from the now infamous Bill Perez CEO year (2005/06) we've never seen a Nike management transition that did not work. It's one area where the company is flawless.



And by the way, for anyone who still had a doubt about whether Charlie Denson was pushed out or retired on his own accord, all you had to do was listen to the conference call. It was as close to a love-fest as we've ever heard on a conference call with existing management bidding thanks and well-wishes.

Gold: A Victory Lap

Takeaway: We update our bearish bias on gold with a contrarian analysis of the fundamental drivers of this asset class.

This note was originally published December 14, 2012 at 15:41 in Macro

(Editor's Note: As you can see in the published date above, we were well ahead of consensus on the collapse of Gold. That's the beauty of being #TimeStamped. We have been The Gold Bears the whole way down. For the record, Hedgeye Risk Management hereby reiterates our Short call. So, all of you knife catchers out there ... consider yourself warned. Please note the chart below highlighting the huge collapse since Hedgeye made our call. It is the only addition to this original commentary.)

Gold: A Victory Lap - Beware Bear


  • Gold remains a crowded long for a variety of very obvious reasons – one of which could become less supportive, at the margins, on a sustainable basis.
  • In the note below, we thought we’d take a stab at how a core component of the bull case (i.e. central bank diversification) can come unwound over the long-term TAIL. It’s very important to note that we’re not positing this as the only factor driving the market price of gold; nor are we necessarily suggesting that this is a thesis to run out and short gold today with. Rather, we are offering intellectual ammunition to understand what’s likely going on behind the scenes in the event gold continues to make lower-highs over the intermediate-to-long term.
  • Sustained weakness in the JPY and EUR along with a diminished EM central bank purchases of gold (relative to investor expectations) could provide the necessary lubrication for a sustained USD rally and lower-highs in the price of gold over the long term.
  • All told, we think investors should consider reducing their allocation to this asset class. At a bare minimum, it would be prudent for gold bulls to confirm whether or not our TAIL support ($1,669) holds before increasing exposure to gold here. If $1,669 breaks, there’s no true support to the prior closing lows.


Gold is widely loved and probably over-owned – at both the institutional and sovereign level. Having appreciated in value for 12 consecutive years with a CAGR of 16.4%, the bull case on gold is well understood by just about every market participant.


This is true from traditional L/S equity hedge fund managers all the way down to retail investors, as ETF volumes have been the only thing mitigating the precipitous decline in physical gold demand. The latest data from the World Gold Council (3Q12) showed overall demand had declined -11% YoY from the all-time peak in 3Q11, with every category posting a contraction except “ETF & similar”:


Gold: A Victory Lap - dar1


Gold: A Victory Lap - 2


It’s not surprising to see demand for physical gold peaked when the price of hit an all-time peak of ~$1,900 early in the quarter.


Gold: A Victory Lap - 3


We’ll hold off on the discussion on gold supply, as we firmly believe PRICE eventually leads supply in most, if not all commodity markets. For example, if the price of gold rips to the upside, gold miners will likely follow the move by instituting aggressive E&P plans. If the gold price were to plummet, many producers will struggle to operate their mines above the cost of capital and will eventually curb production. Anything in between probably equates to a status quo level of supply growth.


Going back to the point we made earlier about the bull case being deeply penetrated, we thought we’d take a stab at how a core component of the bull case (i.e. central bank diversification) can come unwound over the long-term TAIL. It’s very important to note that we’re not positing this as the only factor driving the market price of gold; nor are we necessarily suggesting that this is a thesis to run out and short gold today with. Rather, we are offering intellectual ammunition to understand what’s likely going on behind the scenes in the event gold continues to make lower-highs over the intermediate-to-long term.



Gold has ripped for over a decade as central banks increasingly diversified out of the primary world reserve currency and into other, more credible currencies, as well as other assets like SDRs and Gold.


Gold: A Victory Lap - 4


Gold: A Victory Lap - 5


We hold the view that credibility within the FX market is 100% relative and ever-changing. The management of foreign exchange is a 24-hour-per-day phenomenon that is consistently anchors on incremental data. Below, we focus specifically on the US because gold and other internationally traded commodities are priced in and settled in USD.


For 10+ years, the stream of incremental data has been a general headwind for the credibility of America’s currency, largely in the form of loose fiscal POLICY and dovish monetary POLICY. That confluence of weak POLICY has created an egregious amount of international money supply that has inflated international reserve assets across both the developed world and non-developed world. Initially, the price of gold appreciated w/o much of a shift in global central bank demand. That changed in 2004 when the confluence of the world’s reserve mangers started to accumulate gold at a rate commensurate with the rate of incremental foreign exchange accumulation. Since 2008 (not ironically when QE1 was introduced), however, they’ve been accumulating gold at a faster rate than incremental FX.


Gold: A Victory Lap - 6


Gold: A Victory Lap - 7



The first major run-up in gold (2004-2008) was occurred as DM central banks began favoring gold over incremental foreign exchange, at the margins. The second major leg up in gold prices came as EM central banks began to do the same (2008-present). This is where the real “juice” likely came from, as EM central banks have increasingly held the lion share of international reserve assets.


Gold: A Victory Lap - 8


The latter point is super intuitive, given that EM economies, on balance, have tended to be more manufacturing and export-oriented in nature (think: China). Additionally, EM central banks have likely aggressively accumulated large amounts of foreign exchange (in lieu of gold, at the margins) over the last 10+ years to resist appreciation pressure on their currencies (think: Chinese yuan and Brazilian Finance Minister Guido Mantega’s “Currency War”).


For reference, Switzerland has been doing exactly this (i.e. accumulating foreign exchange at a rate faster than gold) for the better part of 30 years, as the SNB has semi-perpetually combated the specter of a secular loss of competitiveness – which is a real threat given the country’s +42.9% real exchange rate appreciation over that duration. The CHF’s de-facto ceiling vs. the EUR is yet another example of the Swizz central bank being forced to accumulate incremental FX, lest the country suffer the perceived consequences of having a strong currency amid the international “race to zero” in today’s “Beggar Thy Neighbor” global economy.


Gold: A Victory Lap - 9


That brings us to our final point, which is really a question:


Can EM central banks ever really accumulate that much gold – especially relative to consensus expectations that they are poised to be big players in that market in perpetuity?


There seems to be little political will across the developing world to allow for any dramatic currency appreciation – especially with global GROWTH likely tracking in the +2-3% range for the foreseeable future. This means EM central bankers will continue to be forced to daub up large amounts of fiat currency over the long-term, absent a phase change in the global monetary POLICY landscape.


In light of this, it’s important to note that the People’s Bank of China (a key player in the FX reserve accumulation sphere) now views the yuan at/near an “equilibrium level” and they have been using their USD/CNY reference rate as a tool to temper appreciation pressure emanating from the market for several months now. Incremental Polices To Inflate out of DM central banks will force them to accelerate their pace of foreign exchange accumulation if they are going to resist upward pressure on CNY exchange rates from current levels.


What’s new across developed markets is the political will for the Europeans and the Japanese to pursue incrementally aggressive currency devaluation strategies over the intermediate-to-long term. Keep in mind that we haven’t even seen the ECB really go to town w/ unsterilized bond purchases and that the BOJ’s balance sheet is poised to expand to new heights in a variety of experimental manners under the pending LDP regime.


In short, we think Japan faces the risk of a currency crash (peak-to-trough decline > 20%) over the next 12-18 months. Moreover, unless Europe has been magically fixed (are the Greek and Spanish unemployment situations even “fixable”??), the EUR is likely to continue making lower-highs over the long term. In the eyes of the world’s central bankers, the perceived credibility of the JPY and EUR are likely to be materially eroded over the long term, which, on the margin, is positive for other countries’ currencies to the extent they are credible candidates for international reserve management.


In the aforementioned Global Macro scenario, could we see the USD grind higher against a broad basket of currencies over the intermediate-to-long term? Absolutely – especially if US fiscal POLICY starts to get hawkish on the margin (think: Fiscal Cliff). Perhaps that’s why the US Dollar Index is down less than 100bps YoY, despite the Federal Reserve kicking the ZIRP can down the road 3x in the YTD and instituting perpetual QE – twice in the last three months!


Gold: A Victory Lap - 10


If one is bearish on the US Dollar from here, we can’t even begin to fathom what their next catalyst is, given the USD’s resilience in the face of all that…


In the past, strong USD has been really bad for gold (early-to-mid 1980’s and late 1990’s). The most recent period of sustained USD appreciation came on the strength of the Balanced Budget Act of 1997, so it’s critically important to avoid underweighting fiscal POLICY as a factor for the market price of America’s currency. If Congress and the White House can figure out a way to resolve the Fiscal Cliff in a sustainable and effective manner (a really big “if”), we could see the US Dollar Index approach the high 80s/low 90s level over the intermediate term. That would not be good for gold.


Gold: A Victory Lap - 11


Our quantitative risk management levels for Gold are included in the chart below. If $1,669 breaks, there’s no true support to the prior closing lows. That’s something to think about as you ponder, “Who’s the incremental buyer of gold from here?” For some, that question sounds more like, “Who can I offload my gold to if and when I want to head for the exits before the crowd does?”.


Gold: A Victory Lap - 12


Gold remains a crowded long for a variety of very obvious reasons – one of which could become less supportive, at the margins, on a sustainable basis.


Darius Dale

Senior Analyst

Early Look

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