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Don't Get Blown Up

Client Talking Points

GOLD

You learn a lot from bounces during crashes. What we are witnessing right now in Gold is some pathetic "bounces." It is up 20 basis points this morning. It's down 28% year-to-date. Knife catchers buying in last two weeks are down over 12%. For the record, over $62B wiped from precious metals exchange-traded product holdings this year. We have been and we remain the Gold Bears.

ASIA

Japan burns its currency and still gets no inflation. Core CPI in May flat again year-over-year.  Meanwhile, Japan and India both get marked up big into quarter end up +3.5% and +2.8% respectively. Shanghai Comp and Hang Seng marked up less than Japan and India. That said, all four indices remain below Hedgeye TREND lines. For the Nikkei, our immediate-term TRADE risk ranges are now 12,815 - 13,698. Yen moves back to bearish TRADE and TREND in the Hedgeye Risk Management Model.

Asset Allocation

CASH 60% US EQUITIES 12%
INTL EQUITIES 6% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 22%

Top Long Ideas

Company Ticker Sector Duration
HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

MPEL

Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road

TWEET OF THE DAY

The main call the #OldWall missed on Gold was not being Bearish Enough - have been trying to call bottoms; its crashing

@KeithMcCullough

QUOTE OF THE DAY

I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed. –Michael Jordan

STAT OF THE DAY

Gold has dropped 25 percent this quarter, heading for its biggest loss since at least 1920. Gold entered a bear market in April, extending the retreat from its all-time high of $1,921.15 in September 2011.


June 28, 2013

June 28, 2013 - DTR

 

BULLISH TRENDS

June 28, 2013 - 10yr

June 28, 2013 - VIX

June 28, 2013 - dxy

 

BEARISH TRENDS

June 28, 2013 - dax

June 28, 2013 - euro

June 28, 2013 - yen

June 28, 2013 - oil

June 28, 2013 - natgas

June 28, 2013 - gold

June 28, 2013 - copper


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 sales@hedgeye.com 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 sales@hedgeye.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:

  • 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


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

THE HEDGEYE DAILY OUTLOOK

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.                             

                                                                                                  

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:


THE HEDGEYE DAILY OUTLOOK - 10A


CREDIT/ECONOMIC MARKET LOOK:

  • 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

GOVERNMENT:

    • 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

WHAT TO WATCH

  • 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

EARNINGS:

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

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • 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 DAILY OUTLOOK - 5

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS


THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 



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


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.

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