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Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories on Hedgeye's radar screen.

Keith McCullough – CEO

30yrs old, giving up $77M > NJ Devils star Kovalchuk announces retirement (via ESPN)

China Can Endure Growth Slowdown to 6.5%, Finance Chief Says (via Bloomberg)

Treasury Secretary says China to hand audit work to SEC (via Reuters)

Egypt prepares for rival Ramadan protests (via BBC)

 

Morning Reads on Our Radar Screen - asia

 

Daryl Jones – Macro

China GDP To Hit 6.7% (via Zero Hedge)

ETF Simplicity Betrayed by Volatility in Market Selloff (via Bloomberg)

 

Tom Tobin – Healthcare

Affordable Care Act insurance unaffordable for college students (via WorldMag.com)

The Affordable Care Act: The key to opening up ‘job lock’ (via The Bay State Banner)

 

Josh Steiner & Jonathan Casteleyn – Financials

JPMorgan Profit Rises 31% on Trading, Beats Estimates (via Bloomberg)

 

Matt Hedrick – Macro

European Parliament demands spending increase (via The Telegraph

                    

Todd Jordan – Gaming

Cash declaration idea ‘not targeting’ gaming: Tam (via Macau Business Daily)


[PODCAST] KEITH TALKS MONETARY VIAGRA

Has the Fed lost its monetary mojo? Hedgeye Risk Management CEO Keith McCullough weighs in on myriad market signals and whether the Bernanke Fed's Monetary Viagra has finally lost its potency. 

 


Failure of Fed Viagra?

Client Talking Points

GOLD

Is that all Bernanke’s got? The US Dollar Index holds immediate-term TRADE support of $82.52; Gold fails at my $1312 TRADE line in kind. The Fed Chief's Dollar Devaluation attempts are being met with less and less stamina. I can’t imagine why? The Fed’s Balance Sheet is only at $3.504 TRILLION right now (I guess the +11.4 BILLION it's up week-over-week just doesn’t cut it) Rate of change impotence.

ASIA

Over in Asia, Chinese stocks, the KOSPI, etc didn’t care much for Bernanke’s monetary escapades. Shanghai and Hong Kong closed down -1.6% and -0.8%, respectively; that's despite the all-time highs in the SP500 and Russell. Don’t forget that every single major Asian Equity market remains bearish on our intermediate-term TREND duration (other than Japan). #GrowthSlowing

ITALY

The weakest link stops going up first. With the exception of the FTSE and DAX right now (both are only up +1% above their TREND lines), all of Europe is bearish TREND as well. Italy is down small this morning, but notably down post the USA Viagra thing. And it's still down -1.5% year-to-date for the MIB index is the point. 

Asset Allocation

CASH 68% US EQUITIES 12%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
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.

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. 

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. 

Three for the Road

TWEET OF THE DAY

TREASURIES: 2.53% 10yr - Bernanke, is that all you got? you need to snap 2.4% to get me to stop shorting bonds

@KeithMcCullough

QUOTE OF THE DAY

"If the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse."

-- Seth Klarman, Baupost

STAT OF THE DAY

The Fed's balance sheet is now 25% of US GDP and the Fed is currently in possession of 30% of all 10-Year equivalents. (Zero Hedge)


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Hell or High Water

“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.”

-Marie Curie

 

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%

SPX 1

VIX 13.15-15.92

USD 82.52-83.93

Oil 105.84-110.73

Gold 1

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Hell or High Water - HY EL

 

Hell or High Water - Virtual Portfolio


Vacation Unchecked

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 sales@hedgeye.com.

 

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,

 

Felix Wang

Senior Analyst, Gaming, Lodging & Leisure

 

Vacation Unchecked - ww.chartday

 

Vacation Unchecked - ww. porto


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