“Life is not easy for any of us. But what of that? We must have perseverance and above all confidence in ourselves. We must believe that we are gifted for something and that this thing must be attained.”
For those that haven’t been following the news reports from Alberta over the past month, the province and in particular its largest city Calgary, have been devastated by floods. I’ve been up in Calgary, Alberta over the last couple of days meeting with clients and companies and the perseverance to rebuild and recover has been nothing short of amazing.
The most significant tourist and cultural event in Calgary every year is the Calgary Stampede. It is a combination of an outdoor fair and championship rodeo, and attracts many hundreds of thousands of visitors. Fittingly, the slogan of this year’s Stampede is “Come Hell or High Water”, which is an acknowledgement to what the city has gone through to begin the recovery from devastating flooding.
Once a century floods are what we in the risk management business call tail risk events. They are low probability events that occur rarely but have an outsized relative impact. The reality of tail risks, or black swans as Nassim Taleb calls them, is that they actually occur much more often than normally distributed risk model would project.
Back to the Global Macro grind . . .
Yesterday we hosted a call with George Friedman, the CEO and founder of Stratfor, a veritable private CIA. With an army of global contacts and human intelligence collectors, they are rightfully considered among the best and most accurate assessors of global geo-political risks. As a result, their clients include major government organizations, corporations and global asset allocators.
One of the key ideas that Friedman raised on his call was that despite the recent complacency in European equity and debt markets, things may not end well in Europe. From his perspective, which we would agree with, the key political issue in Europe is that the grand experiment of the Euro has really only benefitted Germany. The value of the Euro has supported the 40%+ of exports that drive German GDP, but has failed the rest of Europe. Friedman thinks we may be in the early days of mass popular unrest in Europe across economically disadvantaged European nations outside of Germany.
Next week we will be releasing our quarterly themes, which is how we quantify the most important factors that are, and will be, driving markets and asset returns over the next couple of quarters. Our Q2 themes were growth accelerating, strong dollar, and emerging outflows. These largely played out in spades, particularly emerging market outflows, the extent of which surprised many market participants in Q2. We added the etf EEM, which is a proxy for the emerging markets equities, as a short idea to our Best Ideas product on April 23rd. Since then the EEM is down more than 10%.
On Monday at 1pm eastern we will be hosting our Q3 Themes call, and while I don’t want to want to steal all of the thunder of that call, our Q3 Themes are as follows:
1. #DebtDeflation – This theme analyzes the massive build up of debt globally and then looks at debt by sector to assess the outlook over the coming months. Broadly speaking, you don’t want to be long bonds in the TREND duration. Even if gentlemen prefer bonds, we don’t.
2. #AsianContagion – Our Senior Asia Analyst Darius “Sunny D” Dale has done an outstanding job parsing through the Asian economies over the last eighteen months. This theme primarily looks at the intermediate impact of Japan and China across Asian economies more broadly. By and large, as Chinese economic growth goes, so goes growth across Asia.
3. #RatesRising – This theme has been and will likely continue to have the most meaningful impact on U.S. markets as we’ve seen over the past six weeks with rates breaking out to the upside and devastating the bond markets.
In the Chart of the Day, we’ve borrowed a chart from the Q3 Themes presentation of the high yield index and the potential impact of a reversion to the mean in bonds. As the chart shows, high yield is well below its 10-year average yield of 9.6%. Even if we exclude the anomalous period of 2008 – 2009, in which rates spiked, that average is at 8.6% and well above current levels.
Our research shows that rates reverting to more normal levels won’t actually impede growth, and thus equity market returns. In fact, the best U.S. economic growth rates often occur when the 10-year yield is in the 4 – 6% range. The bond and gold markets, of course, fare much, much worse in a rising rate environment.
In particular, gold has surprised people to the downside this year. Many gold bugs have argued to us that with the recent correction in gold, now is no time to sell. In reality, the facts tell a different story. Gold will continue to underperform in an environment of rising rates and a strong dollar.
Our correlation analysis tells us that the other key factor driving gold is the size of the Federal Reserve balance sheet. In fact, the correlation is over 0.90 on an r-squared basis (so very high). To the extent that the rate of change in the Federal Reserve balance slows, or god forbid declines, it could well be the death knell for gold and gold bugs.
We hope you can join us for our theme call on Monday.
Our immediate-term Risk Ranges are now as follows:
UST 10yr 2.42-2.77%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
This note was originally published at 8am on June 28, 2013 for Hedgeye subscribers.
“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 firstname.lastname@example.org.
Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):
UST 10yr 2.43-2.74% (bullish)
SPX 1559-1622 (neutral)
Nikkei 12815-13698 (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
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.
TODAY’S S&P 500 SET-UP – July 12, 2013
As we look at today's setup for the S&P 500, the range is 47 points or 2.45% downside to 1634 and 0.36% upside to 1681.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.22 from 2.24
- VIX closed at 14.01 1 day percent change of -1.41%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: PPI, M/m, June, est. 0.5% (prior 0.5%)
- 9:55am: U. Mich Confidence, July, P, est. 84.7 (prior 84.1)
- 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
- 1pm: Baker Hughes rig count
- Fed’s Plosser, Bullard speak in Jackson Hole, Wyo.
- 5:15pm: Fed’s Williams presents paper in Vancouver
- President Obama’s schedule TBA; Senate in session; House not in session
- 12pm: CFTC holds meeting to consider “Final Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations”
WHAT TO WATCH
- Billionaire Icahn says he’ll sweeten Dell offer
- China FinMin Lou Jiwei signals economic growth may miss target
- China money-supply growth trails ests
- Schneider Electric offers $5b for Invensys takeover
- H&R Block to sell bank assets in plan to exit Fed oversight
- Fannie Mae investors sue U.S. over 2012 terms of takeover
- Bernanke, G-20, Dell, China GDP, Google: Wk Ahead July 13-20
- JPMorgan Chase (JPM) 7am, $1.45 - Preview
- Washington Federal (WAFD) 6am, $0.33
- Webster Financial (WBS) 8am, $0.47
- Wells Fargo (WFC) 8am, $0.93 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Crude Heads for Third Weekly Advance; Seen Rising in Survey
- Gold Traders Most Bullish in Five Weeks After Fed: Commodities
- Cocoa Processing in Asia Seen Falling as Powder Reserves Persist
- Coffee Harvest in Vietnam Heading for Second Highest on Rainfall
- Copper May Decline 13% on Death Cross Signal: Technical Analysis
- Gold’s Decline Pares Best Week Since 2011 as Dollar Strengthens
- Corn Falls on Signs of Ample Supplies Amid Declining Demand
- Palm Oil Tumbles as USDA Raises Forecast for Soybean Supplies
- Ships Told to ‘Shift Out’ at Kaohsiung on Typhoon: Inchcape
- WTI Crude May Gain Next Week After Supplies Tumble, Survey Shows
- Tokyo Commodity Exchange’s Ezaki Says Talks With CME Continue
- Taqa to Halt U.K.’s Eider, North Cormorant Oil Fields End-August
- Nickel Premiums Hit Lows Amid High Stocks, Oversupply: BI Chart
- Coffee Climbs in London as Rain Seen Delaying Crop in Indonesia
The Hedgeye Macro Team
THE MACAU METRO MONITOR, JULY 12, 2013
GRAND WALDO OVERHAUL TO TAKE SIX MONTHS Macau Business
Galaxy has requested government permission to suspend operations at the Grand Waldo hotel and casino for six months. Galaxy bought the controlling stake in the Grand Waldo last month and closed the property on July 1 for renovations.
It appears no major architectural changes will be made to the property and it may reopen in time for Lunar New Year.
Business Daily quotes a gaming industry source as saying that Galaxy Entertainment was “expected” to apply to use the Grand Waldo’s 38 live gaming tables and 148 slot machines at its other properties.
SINGAPORE 2ND QUARTER GDP GROWTH STRONGEST IN OVER TWO YEARS Reuters
According to advance estimates from Singapore's Ministry of Trade and Industry, 2Q GDP grew an annualized and seasonally adjusted 15.2% QoQ, nearly double the 8.3% median forecast of economists polled by Reuters. The quarter-on-quarter expansion in GDP was the strongest since the first three months of 2011. From a year ago, GDP rose 3.7%, improving from the first quarter's 0.2% YoY expansion and beating the median forecast for a 2.0% expansion.
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