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Sharks, Vampires & Central Planners

This shark – swallow you whole.

- Quint, “Jaws”

 

Sharks, Vampires & Central Planners - quint

 

We often hear government economists and policy makers express concern that market turmoil might “spill over and affect the real economy,” an Orwellian locution where the price of oil spiking over $110 is seen as a “market dislocation,” and not as a multi-billion dollar tax on America’s middle class.

 

There have been measurable benefits from government programs going back to the first responses to the crisis under Treasury Secretary Paulson, though largely of dubious value.  The fact that we spent a trillion dollars to keep a bunch of bankers employed, while technically a win for the nation’s employment statistics, was arguably not the application that would have attained the utilitarian goal of the Greatest Good for the Greatest Number.

 

Last week saw a convergence of data points that all point to the likelihood that Chairman Bernanke wants to retain Friends in High Places, assuming that his legacy will be set not by those who write history – and especially not by those who live it – but by those who decide what gets published.  (Quoth the Duke of Gloucester, patron of historian Edward Gibbon, upon being presented with the completed Decline and Fall of the Roman Empire, “Another damned thick, square book!  Always scribble, scribble, scribble, eh?”)

 

We don’t mean to scoff at the very real suffering caused by economic collapse, but Hedgeye holds firm to the view that government meddling in the economy is generally not a good thing, and that a long-term program of persistent government meddling in the economy is a decidedly harmful thing. 

 

Government intervention has the predictable effect of shortening economic cycles, while also increasing volatility – perhaps two sides of the same coin of time compression.  In consequence, it also has the predictable effect of generally not really fixing anything and of battering the middle class, edging them nearer to the abyss with each new policy nudge.

 

By the Fed’s own reckoning, each successive round of QE has a diminishing impact on the markets.  Mind you, that impact is measured in basis points – one-hundredths of a percent – and the twenty-five basis point impact looked for from any future round of QE is not predicted to last.  The banks are still not lending, largely because of uncertainty over government policy.  But don’t blame the banks.  People aren’t borrowing, for much the same reason: no one wants to take a loan to expand a business that might be shot execution style by the Fed suddenly reversing its interest rate policy.

 

Sharks, Vampires & Central Planners - qe2

 

So, if the Fed’s easy money policy is not supporting the “real economy,” who is benefitting from it?

 

Most excess liquidity seems to be supporting the short-term trading of major financial houses – which helps explain the furor over the Volcker Rule, designed with the sole purpose of walling off risk trading from deposit taking (a proposition that a tenth-grader could clearly articulate in a single sentence – do you know a tenth grader who wants to be President?)

 

Wealthy folks are going to get wealthier through this artificial inflation in asset prices.  This has been the effect of each previous round of money printing, and is likely to continue.  But each successive round of QE also takes a moral chunk out of the nation’s Middle Class, not to mention shredding American credibility in the global marketplace.  Our markets used to be the gleaming city on the hill.  Now they are just the Best House in a Bad Neighborhood.  How long before they turn into a slum? 

 

Hedgeye’s institutional clients were treated last week to an exclusive conference call with George Friedman, founder and chairman of Stratfor, the global intelligence and strategic risk assessment consultancy.  Friedman says the decimation of the middle class brought about by government neglect and economic malaise has historically been a key indicator of pending social unrest. 

 

We think America still has a way to go before chaos strikes, but we remember that Secretary Paulson got Congress to trigger TARP by predicting there would be marshal law within a matter of days – a dire prediction that this nation’s leaders bought into.  TARP was passed with a large number of legislators never having even read the bill.

 

If you were worried that Washington might actually get some control over Bad Actors in the financial sector, you can breathe easy.  All that posturing and crying “Sh*t!” in a crowded Senate hearing made for mildly engaging reality TV, but in the end Business As Usual remains the mantra in the City of the Perpetual Extended Palm.  (For colorful commentary on the Senate financial crisis hearings, and other Washington-to-Wall-Street low points, see the Hedgeye e-book Fixing A Broken Wall Street). 

 

Sharks, Vampires & Central Planners - doll5

 

Bernanke’s fiddling in the system has the effect of trashing the Dollar, and of spiking asset prices – the value of stocks in your 401(K) just went up, but so did the price of gas, effectively an instantaneous tax hike.  By creating waves of volatility in the markets, Bernanke is doing his utmost to keep the bankers banking and the traders trading. 

 

To return to scary summer movie metaphors, while you are out frolicking in the surf, why are the Central Planners avoiding the sunlight?  Are they vampires, or do they just not like being around We The People?  Be careful out there: even at low tide you won’t see the shark until it’s upon you.


Morning Reads on Our Radar Screen

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

Keith McCullough – CEO

Live, From Congress, It's "Delivering Beta" With Ben Bernanke (via Zero Hedge)

China Won’t Have Large Stimulus This Year, Finance Minister Says (via Bloomberg … KM note: Hedgeye's call, precisely)

Barclays, Traders Fined $487.9 Million by U.S. Regulator (via Bloomberg … KM note: What's 1/2 a billion, amongst #OldWall friends?)

Seized N Korean ship: Cuban weapons on board (via BBC)

Olbermann Will Return To ESPN (via New York Times)

 

Morning Reads on Our Radar Screen - bbo

 

Christian Drake – Macro

Bernanke: Bond-Buying Plans Not 'A Preset Course' (via WSJ)

 

Todd Jordan – Gaming

Bally Sees Winning Hand In $1.3 Bil SHFL Buyout (via IBD)

 

Tom Tobin – Healthcare

Health Plan Cost for New Yorkers Set to Fall 50% (via New York Times)

Man battles health insurer for drug that could save his life (via Today Show)

 

Howard Penney – Restaurants

Janney Montgomery Scott Slashes Rating, Target on McDonald’s (via Dividend.com)

McDonald’s and Visa Conjure Fantasy Budget for Low-Wage Employees (via Daily Beast)

Teenager Wears Dirty Trousers as Late British Open Qualifier (via Bloomberg)

 

Kevin Kaiser – Energy

Linn Energy (LINE) and LinnCo (LNCO) upgraded to Buy at Goldman Sachs (via Business Insider … KK note: We reiterate Sell.)

 

Josh Steiner – Financials

BofA Beats Estimates as Profit Rises 63% on Expense Controls (via Bloomberg)

Housing starts fall to ten-month low (via Reuters)

 

Matt Hedrick – Macro

'Romanian gypsy ghettos. Schools filled with children who do not speak our language. A surge in crime. Social benefits abused': Now GERMANY admits mass immigration threatens 'social peace' (via Daily Mail)


MID-JULY CRUISE PRICING

Caribbean still a tough pricing environment but Europe is holding its ground.

 

 

RCL will likely report earnings next week.  We expect management to comment on the bookings environment improving since the Grandeur of the Seas fire.  However, based on our findings, Caribbean pricing has not improved since the incident.  The pivot variable in its FY2013 guidance is once again determined by the outlook on Europe, which we believe continues to trend better than the company’s conservative forecast.  Better than expected performance in Europe coupled with a weaker Caribbean leads us to forecast FY 2013 yield guidance narrow to 2.5%-3.5% from 2.0-4.0%.  However, there remains risk to the downside, particularly on F3Q.  FY 2013 expectations on the buy-side and sell-side have been lowered in the past month.   2013 FY net yield Street consensus is at 3.1% (Hedgeye: 3.0%).

 

While it has only been two weeks, pricing seems to be under even more pressure since management issued guidance – not only for the rest of the year but also for 1H 2014.  Management indicated on their conference call that they do not expect the Carnival brand to show yield improvement until 2H 2014.  However, unless Europe shows tangible growth, 2014 consensus for 2.5% net yield growth looks aggressive right now.  It is early but we’re seeing no signs of regaining pricing power in the Caribbean and Mexico.

  

Here is what we’re seeing from our proprietary pricing survey of >12,000 itineraries for mid-July.  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 i.e. RCL: 4/25, CCL: 6/25, NCLH: 5/6

 

NORTH AMERICA

 

Caribbean

  • Royal Caribbean
    • RC brand pricing for F3Q and F4Q has not recovered from the Grandeur of the Seas (5/27) incident.  For example, Oasis of the Seas which had averaged over $1,000 per itinerary in early June had fallen close to $800 by mid-July (in the respective year ago periods, prices averaged close to $1,000).  Yes, most of the cabins are filled but the lack of pricing stickiness is concerning.  F1Q 2014 RC pricing was also moderately lower while F2Q 2014 pricing was moderately higher and trend was stable.
    • Celebrity’s pricing trend for F4Q and F1Q 2014 was lower with lower YoY pricing.
    • Pullmantur F3Q pricing fell in the mid-digits in early July and remained there in mid-July.  Its F4Q 2013 and F1Q 2014 pricing trend was flat to slightly negative.
  • Carnival brand
    • While it’s only been two weeks since Carnival’s last guidance, pricing is losing ground fast.  FQ4 2013, FQ1 2014, and FQ2 2014 pricing were all lower by double digits YoY.  Pricing trend for FQ4 2013 and FQ1 2014 particularly weakened in the last two weeks.  The Carnival brand accounts for 83% of CCL’s total capacity in the Caribbean.   
  • Norwegian
    • Norwegian's Caribbean pricing trend declined for Q3 2013, mainly due to a 16% tumble in Breakaway prices.  Breakaway prices, which had been resilient in June, finally cracked under a tough pricing environment.  Overall, NCLH Q4 2013 and Q1 2014 pricing trend was flat.  Meanwhile, Getaway’s pricing for February/March 2014 itineraries remained steady, though 12% lower than that seen in May.

EUROPE

  • Royal Caribbean
    • Very close-in F3Q RC pricing was moderately weak.  However, F4Q RC pricing crept into positive territory.
    • Celebrity YoY pricing remained nicely higher in the double digits for F3Q and F4Q. 
    • Pullmantur Mediterranean very close-in F3Q pricing was stronger in the two weeks ago but F4Q pricing trend deteriorated.
    • European capacity accounts for 49% and 25% of total capacity in F3Q and F4Q, respectively. Celebrity accounts for 33% of capacity in F3Q and F4Q, respectively, while the RC brand accounts for 48% and 35% of capacity in F3Q and F4Q, respectively.
  • Carnival
    • Costa F3Q pricing, which continued to fall since June, was unchanged relative to the beginning of July.  Costa’s FQ4 pricing remained strong at double digit growth.  Costa’s early FQ1/FQ2 2014 pricing did not change much.  Princess, Cunard, and AIDA F3Q/F4Q pricing trend were fairly stable, while Holland America pricing declined slightly in the last two weeks.
    • We estimate Costa accounts for 40-50% of total European capacity in F3Q and F4Q
  • Norwegian
    • F3Q prices continued its downward trend since May. F1Q 2014 pricing improved slightly. 

 

OTHER MARKETS 

 

Alaska

Not many itineraries left.  Holland America continued to discount aggressively in F3Q and F4Q.  Norwegian and the RC brand also slashed F3Q prices.  On the brighter side, Princess pricing was impressively higher YoY.

 

Mexico

Carnival brand’s pricing struggles in Mexico remain for F3Q, partially due to hard comps.  Carnival brand’s F4Q 2013 and F1Q 2014 pricing both took a heavy hit in July and trend is declining.  

 

Asia/Australia

1Q 2014 RC brand pricing strengthened in mid-July.  Costa’s F4Q 2013 and F1Q 2014 pricing remained robust.


Early Look

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CHINESE REALITY CHECK

Client Talking Points

CHINA

So, China’s Finance Minister says they “won’t use large scale stimulus.” Take his word for it. Shanghai Composite led losers down -1% in Asia overnight. Meawhile, Singapore put up a nasty (ex-Oil) Export print of -8.8% year-over-year in June. What that says is ex-Japan Asia #GrowthSlowing.

USD

Everyone and their brother are trying to front-run Ben Bernanke breathing appointments at this point. It's sad, but that’s the reality. CRB Index up +0.6% yesterday with Gold, Oil, etc chasing higher on a -0.7% US Dollar day. Will Bernanke be dovish enough? We shall see. But this is a certified central planning expectations circus; EUR/USD TAIL risk line is 1.31. That could go either way.

COMMODITIES

Copper down -1.1% on the China reality-check (short CAT again on that too). But Brent is still pinning her hopes on Benny. $109.40 last is above our long-term TAIL line of $107.86. That's important. The net long position in futures/options for everything crude oil has gone hog wild; over 325,000 net longs! (biggest long lean of the year).

Asset Allocation

CASH 58% US EQUITIES 16%
INTL EQUITIES 6% 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

Goldman upgrades $LINE $LNCO to Buy. We reiterate Sell.

@HedgeyeEnergy

QUOTE OF THE DAY

"We keep kicking the can down the road. But maybe now we're at the point where the can is kicking back"

- Jim Chanos

STAT OF THE DAY

$487.9 Million: The total amount in fines and penalties Barclays and four former traders must pay in an order tied to an investigation of alleged manipulation of energy markets. (Bloomberg)


Heaven and Power

This note was originally published at 8am on July 03, 2013 for Hedgeye subscribers.

I am quite unable to see why Heaven or any other Power should object to our telling the Moslem what he ought to think.”

-Arthur Balfour

 

It’s no wonder why history remembers Lloyd George’s decision making process in Paris in 1919 as so politically conflicted and morally confused. Balfour (British Foreign Secretary 1916-191) and Henry Wilson (George’s chief of the British Imperial Staff) would almost come to blows on big imperialist planning topics (like what to do in Turkey).

 

Also overlooked were the Turks themselves. Almost everyone in Paris assumed that they would simply do as they were told. When Edwin Montagu, the British Secretary of State for India cried, “Let us not for Heaven’s sake, tell the Moslem what he ought to think, let us recognize what they do think.” (Paris 1919, Six Months That Changed The World, pg 380)

 

Does getting a bunch of pompous politicians in a room in Paris solve or perpetuate the world’s long-term risks? Post WWI, the answer to that was a disaster. There’s no reason to believe that trying to centrally plan the Egyptians or Portuguese this morning is going to be a success story either. Our centrally planned world is long of political arrogance and short of human empathy.

 

Back to the Global Macro Grind

 

From a globally interconnected risk perspective, this morning is one of the uglier ones I’ve seen in the last few months. It’s not just Egypt jamming oil prices up and Portuguese bond yields blasting higher either. Here’s what’s going on:

 

1.   ASIA – Indonesian stocks (-3%) and the Hang Seng (-2.5%) led a broad based ex-Japan meltdown in Asian Equities overnight. China printed another miss on the Services PMI front (53.9 vs 54.3) in June and it has become clear that Asian #GrowthSlowing is a reality. Every single Asian Equity market other than Japan is now bearish TREND @Hedgeye.

 

2.   EUROPE – Greek stocks continue to crash this morning (-30% since May 17th); Portugal’s stock market is down -5.7% (10yr bond yield in Portugal tested 8% for the 1st time since November); and the rest of European major Equity markets are trading straight down (Spain -3%, Germany -1.8%, etc); every European Equity market remains bearish TREND @Hedgeye.

 

3.   CURRENCIES/COMMODITIES – Dollar down small so far, and that’s not a good thing for US Equities (6mth correlation between SPY and USD = +0.76); Brent Oil is testing a breakout back above its $104.95 TREND line @Hedgeye this morning – any sustained close above that price could impose a sequential tax on global consumption in July-August.

 

Then of course you have Snowden banging around in Bolivia with Morales (or will they be dining in Vienna this evening?) as Obama fans try to put out multiple fires, including another delay on Obamacare.

 

What on earth could possibly go wrong?

 

They begged for (and obtained) a mandate for global central planning and now we’re going to have to deal with their mess. How much longer this can continue is anyone’s guess. All the while, there’s one mother-load of their sovereign debts we can short while we wait.

 

Under our new Global Macro Theme (that was born out of a Q2 one #EmergingOutflows) we are going to roll with emerging #DebtDeflation here in Q312. Yesterday we re-shorted the iShares USD Emerging Market Debt Bond Fund (EMB) and we’re looking forward to introducing a whole new bag full of short ideas in our upcoming Q3 Hedgeye Macro Themes Call. Basically, short politicians.

 

So if you can’t buy Sovereign Storyteller’s Debt – and you can’t buy Asian or European Equities, what’s left?

  1. US Dollars
  2. US Equities
  3. Beer, Wine, etc.

It’s a good thing US Equity markets close early today. You can get an early start on allocating some of your hard earned 2013 US Equity gains to option #3.

 

Since we have 26% of the Hedgeye Asset Allocation in US Dollars this morning and only 14% in US Equities (60% is in Cash, which means 0% allocations to International Equities, Fixed Income, and Commodities), we don’t feel like we’ll look entirely naked if the tide rolls out on our 1592 intermediate-term TREND line of support for the SP500 either (5 LONGS, 4 SHORTS @Hedgeye).

 

Buying anything US Equities is no way to live. Utilities (XLU) versus Consumer Discretionary (XLY) already has a +215 basis point performance spread for Q312 to-date (Utilities -1.28% vs Consumer Discretionary +0.87%). Don’t forget that #StrongDollar and #RisingRates punishes Yield Chasers, people investing in MLPs that can’t pay their dividend (LINE), etc.

 

As for Heaven and Power, and for the Moslem and Canadian out there that some American central planner wants to pass personal judgment on next, well – on this 4th of July, I’ll be betting on the men and women who will fight for their freedoms, all day long.

 

Our immediate-term Risk Ranges are now:

 

UST 10yr 2.41-2.63%

SPX 1599-1627

DAX 7686-8061

VIX 15.31-17.97

USD 82.78-84.04

Oil 100.22-104.95

 

Happy 4th of July, and best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Heaven and Power - Bond Price Deflation

 

Heaven and Power - vp 7 3


July 17, 2013

July 17, 2013 - dtr

 

BULLISH TRENDS

July 17, 2013 - 10yr

July 17, 2013 - spx

July 17, 2013 - dax

July 17, 2013 - dxy

July 17, 2013 - oil

 

BEARISH TRENDS

July 17, 2013 - SHCOMP

July 17, 2013 - VIX

July 17, 2013 - yen

July 17, 2013 - natgas

July 17, 2013 - gold
July 17, 2013 - copper

 


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