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.”
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 firstname.lastname@example.org 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:
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 email@example.com 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:
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
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.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
“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.
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,
Senior Analyst, Gaming, Lodging & Leisure
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.
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