prev

U.S. Growth - #TRENDING

Takeaway: Ahead of a big data week, we take a visual tour of domestic Macro TRENDS. On balance, the TREND remains the friend of U.S. Equities.

While we’ve had a series of policy driven, compressed economic cycles over the last 4+ years, the reality is that economies are generally reflexive, self-reinforcing in both directions, and not as whimsical as media reporting fettered in mania and recency bias would hope you to believe. 

 

An honored idiom in the Hedgeye Macro Manifesto says that everything that matters in Macro happens on the margin.   While data myopia has its place and forecasting inflections in the slope of growth remains the game, its important to contextualize the most recent data within the context of the slope of the TREND.  

 

With FOMC, 2Q GDP, PCE, Home Sales, Confidence, Vehicle Sales, Treasury 3Q debt funding estimates, and Employment all on the docket, there will be a lot of macro tree’s to stare at this week.  Ahead of that, below we take a small step back with a quick visual tour of the domestic macro forest (i.e the TREND). 

 

We can certainly identify some prospective growth headwinds, and we’ll gladly change our view as the research and price signals shift but, on balance, the TREND in the data we’re generally concerned with  -  Labor, Housing, Confidence, Consumption, Credit - remain positive.  A summary review of those metrics below.   

 

Employment:  The Trend in Initial Claims remains one of accelerating improvement while employment growth as measured by the BLS’s Establishment and Household Survey’s both remain positive.  The Unemployment rate continues to reflect solid Trend improvement and State & local government employment (~14% of the Workforce) registered positive growth in May for the 1st time since June of 2009.  

 

U.S. Growth - #TRENDING - NSA CLaims 072513

 

U.S. Growth - #TRENDING - NFP   CPS Employment 072613

 

U.S. Growth - #TRENDING - State   Local Govt 072613

 

HOUSING:  Housing has largely realized the parabolic recovery we forecast back in 4Q and home price appreciation, home builder sentiment and household formation trends all remain strong.  From here, its likely the rate of change decelerates a bit as we come up against increasingly steeper pricing comps. 

 

Here, its increasingly important to define the targeted investment duration with respect to housing and to separate the investment conclusion from the broader economic impact.  On the investment side, we have been out of the way of housing for the last couple months, but remain bullish on the intermediate/long-term demand dynamics and are looking to buy back long exposures as expectations re-base.   From a secular top down perspective, a deceleration in home price growth from a mid-teen’s to mid-upper single digit growth rate will remain an ongoing support to the domestic recovery.

 

U.S. Growth - #TRENDING - Corelogic

 

U.S. Growth - #TRENDING - Homebuilder Survey 072613

 

Source: Hedgeye Financials

U.S. Growth - #TRENDING - Household Formation 

 

CONFIDENCE:  Confidence readings across the primary surveys continue to make new 5Y highs and are finally beginning to break out of their post recession channel.  Historically, correlations between confidence and economic activity have been strong to very strong.   We expect Confidence - Econ correlations to re-tighten and measures such as money velocity and new orders to begin to pick-up should the emergent breakout in consumer and business confidence sustain itself.  

 

U.S. Growth - #TRENDING - Consumer Confidence 072613

 

CREDIT: Banks are finally beginning to report loan growth in recent quarters, affirming trends in the FEDs Senior Loan Officer survey which show Commercial & Residential Real Estate loan demand improving and credit standards across commercial and consumer loan categories continuing to ease.  We expect positive demand trends to continue alongside ongoing labor market & private sector balance sheet improvement  with further easing in standards following pro-cyclically in the wake of improving credit risk and rising demand.

 

Household net wealth is making new nominal highs alongside housing and financial asset re-flation while Household debt service ratio’s remain at trough levels and total household debt/GDP continues to decline.  We remain in a debt sweet spot of sorts for households with the potential for the flow of net new credit to support consumption while debt ratio’s continue to decline concurrently.   

 

U.S. Growth - #TRENDING - Household BS 3 Adj

 

U.S. Growth - #TRENDING - HH Debt vs Income growth

 

U.S. Growth - #TRENDING - Fed Long Demand 2Q13

 

DEFICIT SPENDING:  The Federal budget deficit has been in retreat as growth/tax receipts have exceeded initial forecasts while stabilizer payments have declined and other one-times (Fannie/Freddie payments to treasury, HARP payments to treasury, GM Sales, etc) have supported treasury inflows.  Congressional Debt and Budget talks have (thankfully) been almost non-existent this year as the upside surprise in deficit spending allowed the party’s to remain on mute and/or focus energies elsewhere.  

 

As a reminder, the official suspension of the Debt Ceiling brokered alongside the Fiscal cliff resolution lasted until 5/19/13 with the Treasury currently employing ‘extraordinary measures’  to keep things going.  The partisan rhetoric has begun to bubble in the last couple weeks and we expect the Budget and Debt Ceiling acrimony to pick up in earnest in August alongside budget talks.   The treasuries ability to keep things going is currently expected to last, at least, until September and as late as November.  The treasury will announce its quarterly refunding plans for government operations on Wednesday (7/31).

 

 U.S. Growth - #TRENDING - Budget Deficit

 

 

CONSUMPTION:  We’ve seen a strong 3 quarter acceleration in consumer spending through 1Q13 – a  streak that will likely end with reported 2Q13 GDP as personal income and spending growth was constrained by a rising saving’s rate, muted wage inflation and negative tax law impacts.   Upside in disposable personal income will probably remained constrained over the balance of the fiscal year as  ~2% of the workforce sees ~7% reduction in income alongside federal government furloughs and ongoing layoffs.  

 

U.S. Growth - #TRENDING - Auto Sales

 

U.S. Growth - #TRENDING - U.S. Consumption

 

We would note that retail sales and durable goods (auto’s) have been decent despite the consumption headwinds.  Indeed, the realities of the existent fiscal policy drags (sequestration, tax increases, etc) and the fact that the economy is not in full escape velocity mode are well advertised if not fully understood. 

 

Further, the seasonality in the reported data, which is currently a headwind, will reverse come September.  So, optically, seasonality will amplify any ongoing, organic improvement in the labor market and broader domestic macro data just as panglossian storytelling about a diminishing fiscal drag and easier comps as we annualize the tax and sequester events will begin to hold greater appeal. 

 

Outside of Financials, 2Q13 earnings haven’t been particuIarly great but that’s not a new phenomenon and valuation-in-isolation is still not a catalyst.  Does a multiple turn (or three) matter in the short/intermediate term in an the era of global capital market liberalization and integration, accelerating capital mobility, and a global over-allocation to debt that is facing a negative inflection? 

 

Can expensive get modestly more expensive and cheap cheaper when asset class optionality (you don’t want to be long Commodities, Emerging Markets (Debt, equity, currencies), Yen’s, or most of Europe) continues to contract?  

 

We think so – particularly if the dollar can continue to strengthen, investor's get increasingly comfortable with the implications of  #RatesRising and real yields on domestic assets continue to increase. 

 

Big Data week this week.  Pay attention to the trees, but don’t get so close to the bark that your returns get enucleated. Keep mind of the forest – at present, the Trend is still your friend.  

 

U.S. Growth - #TRENDING - Real Yield vs Fx 6M Chg

 

 

Christian B. Drake

Senior Analyst 

 


European Banking Monitor: Setup Still Favorable

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

---

 

European Financial CDS - Russia's megabank, Sberbank, saw its recent trend of tightening swaps come to an end, with a 17 bps increase last week to 224 bps. Sberbank swaps effectively reflect Brent crude oil prices. Bank swaps followed the lead of respective sovereign swaps, for the most part, with Spanish and Portuguese swaps tightening noticeably. UK bank swaps also tightened last week by an average of 7 bps.

 

European Banking Monitor: Setup Still Favorable - vv. banks

 

Sovereign CDS – Sovereign swaps were tighter across the board last week, led by Portugal (-53 bps), Spain (-19 bps) and Italy (-16 bps). The U.S., Germany and Japan were all tighter by 1-2 bps as well. 

 

European Banking Monitor: Setup Still Favorable - vv. sov1

 

European Banking Monitor: Setup Still Favorable - vv.sov2

 

European Banking Monitor: Setup Still Favorable - vv.sov3

 

Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Setup Still Favorable - vv.euribor

 

ECB Liquidity Recourse to the Deposit Facility – Deposits were essentially unchanged last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Setup Still Favorable - vv. facility


LOWER HIGHS: IS IT TIME TO BOOK GAINS IN THE ABENOMICS TRADE?

Takeaway: The Abenomics trade is now squarely underwater with an increasingly convoluted immediate-to-intermediate-term outlook.

SUMMARY BULLETS:

 

  • Over the past couple of months, the Abenomics trade has encountered a meaningful amount of resistance.Specifically, both the USD/JPY cross and the Japanese equity market are making lower-highs relative to the YTD highs that were established on 5/17 and 5/22, respectively. In a way, this is the Global Macro equivalent to being underwater relative to previously-established high water marks.
  • For now, there is little from an absolute or relative policy perspective that supports a continuation of recent market movements.
  • Regarding Japanese monetary policy, BoJ Governor Kuroda delivered a thorough presentation today to the Research Institute of Japan. Having read through the full transcript of Kuroda’s lengthy speech, there was hardly anything incremental as it relates to the outlook for the BoJ’s “Quantitative and Qualitative Easing” program and our commensurate outlook for JPY debasement.
  • The one caveat to that statement is that the BoJ is forecasting that +2% inflation will not be reached until the second half of FY15, which is roughly six months later than initial expectations. That takes some wind out of our sails as it relates to our real interest rate differential argument on why the USD is likely to appreciate another 12-27% vis-à-vis the JPY over the next 12-18 months. Now we’re looking at a catalyst that is closer to 18-24 months away, which is an obvious negative for preexisting long-USD positions in the futures, forwards and options markets.
  • Anything can happen at this Wednesday’s FOMC meeting. If the US monetary policy powers-that-be decide to debauch the USD from here (stymying US growth in the process), all bets are off as it relates to the Abenomics trade from an immediate-to-intermediate-term perspective – particularly in the event that TREND support for the USD/JPY cross and Nikkei 225 confirm any violation to the downside that is also confirmed by a TREND line breakdown in the US Dollar Index.
  • We don’t disrespect TREND line breakdowns (or breakouts) and neither should you to the extent you have been involved in this trade. Absent a marked shift in Fed policy from previously-issued guidance, our long-term thesis with respect to the Abenomics trade hasn’t changed one bit. That said, however, investors must remain mentally flexible enough to respect – and potentially profit from – the nonlinearity involved with traveling from point A to point B in financial markets.

 

From a long-term perspective, you know where we stand with respect to the Abenomics trade. Specifically, we are calling for the USD/JPY cross to trend ~12-27% higher from current levels over the intermediate-to-long term, which would likely continue to prove positive for Japanese equity reflation – assuming interest rate volatility remains muted (which is certainly a big “if” indeed).

 

It’s the same thesis we authored last fall and nothing from a fundamental perspective (i.e. relative and absolute monetary and fiscal policy) has us even considering to consider abandoning this view. For those of you who may be new to this thesis or our research behind it, we encourage you to review the following notes:

 

 

Over the past couple of months, however, the Abenomics trade has encountered a meaningful amount of resistance. Specifically, both the USD/JPY cross and the Japanese equity market are making lower-highs relative to the YTD highs that were established on 5/17 and 5/22, respectively. In a way, this is the Global Macro equivalent to being underwater relative to previously-established high water marks.

 

LOWER HIGHS: IS IT TIME TO BOOK GAINS IN THE ABENOMICS TRADE? - USDJPY

 

LOWER HIGHS: IS IT TIME TO BOOK GAINS IN THE ABENOMICS TRADE? - Nikkei 225

 

In the context of the LDP-NKP coalition securing the necessary votes for a bi-cameral majority in the recent Upper House election – which effectively grants them the right to pursue a variety of game-changing fiscal and monetary policies in pursuit of their +5% “monetary math” target – the aforementioned lower-highs are an ominous sign indeed.

 

For now, there is little from an absolute or relative policy perspective that supports a continuation of recent market movements.

 

Regarding Japanese fiscal policy, the market is still waiting with baited breath on credible fiscal reform strategies and whether or not the consumption tax will be hiked in FY14 as currently planned. It’s too early to tell whether or not there will be any material disappointments or positive surprises emanating from this arena. The market is truly in wait-and-see mode on this front.

 

Regarding Japanese monetary policy, BoJ Governor Kuroda delivered a thorough presentation today to the Research Institute of Japan. Having read through the full transcript of Kuroda’s lengthy speech, there was hardly anything incremental as it relates to the outlook for the BoJ’s “Quantitative and Qualitative Easing” program and our commensurate outlook for JPY debasement.

 

The one caveat to that statement is that the BoJ is forecasting that +2% inflation will not be reached until the second half of FY15, which is roughly six months later than initial expectations. That takes some wind out of our sails as it relates to our real interest rate differential argument on why the USD is likely to appreciate another 12-27% vis-à-vis the JPY over the next 12-18 months. Now we’re looking at a catalyst that is closer to 18-24 months away, which is an obvious negative for preexisting long-USD positions in the futures, forwards and options markets.

 

LOWER HIGHS: IS IT TIME TO BOOK GAINS IN THE ABENOMICS TRADE? - BoJ Forecasts

 

It’s important to remember that everything that matters in Global Macro trading occurs on the margin; prospect theory best describes this view from an academic perspective. With that in mind, we can see why the dollar-yen rate and the Nikkei are backing off here, forming lower-highs in the process. Whether or not they hold on to current higher-lows and, more importantly, their respective TREND lines of support is the key question as it relates to your gross exposure to this trade.

 

Anything can happen at this Wednesday’s FOMC meeting. If the US monetary policy powers-that-be decide to debauch the USD from here (stymying US growth in the process), all bets are off as it relates to the Abenomics trade from an immediate-to-intermediate-term perspective – particularly in the event that TREND support for the USD/JPY cross and Nikkei 225 confirm any violation to the downside that is also confirmed by a TREND line breakdown in the US Dollar Index.

 

LOWER HIGHS: IS IT TIME TO BOOK GAINS IN THE ABENOMICS TRADE? - DXY

 

We don’t disrespect TREND line breakdowns (or breakouts) and neither should you to the extent you have been involved in this trade. Absent a marked shift in Fed policy from previously-issued guidance, our long-term thesis with respect to the Abenomics trade hasn’t changed one bit. That said, however, investors must remain mentally flexible enough to respect – and potentially profit from – the nonlinearity involved with traveling from point A to point B in financial markets.

 

Stay tuned.

 

Darius Dale

Senior Analyst


real-time alerts

real edge in real-time

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.

NCLH 2Q 2013 REPORT CARD

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance


 

OVERALL:  

  • IN-LINE:  Decent 2Q results are offset by lower 3Q yield guidance.  We have been seeing pricing weakness in Alaska from our surveys for the past couple of months.  NCLH is the 1st cruise operator to acknowledge the heightened discounting environment that is impacting bookings there.  Overall, NCLH's guidance range at the start of the year was wide enough to accomodate the volatility in quarterly performance.  

NCLH 2Q 2013 REPORT CARD - nclh2

 

2Q GUIDANCE

  • BETTER:  2Q EPS of $0.29 came in above its guidance of $0.24-0.28.  Adjusted for the dry docks and other supplemental costs (e.g. Breakaway advertising), NCC ex fuel of 4.8% also was better than its guidance (5.0%-6.0%).

PRIDE OF AMERICA DRY DOCK

  • WORSE:  Dry dock will be completed by the end of the year, later than previously estimated
  • PREVIOUSLY:  "During her two-week dry dock, we commenced a project which converted the space previously housing an under-utilized conference center into 32 staterooms, including 24 luxury suites and 4 studio staterooms, allowing more families and, now, solo travelers to experience this unique product. Completion of this project is expected to be in early September, if not sooner. 

ALASKA

  • WORSE:  Mgmt blamed the additional capacity in the market for the underperformance in 3Q
  • PREVIOUSLY:  "The Alaska market is very, very strong. And you're right, it's absorbing a lot of new capacities for the industry. But we understood what was happening when we went into it, so it's pretty much operating the way we had expected it in our budget."

EUROPE

  • SAME:  Believes ticket yield has bottomed in this region.  
  • PREVIOUSLY:  
    • "We're starting to see some real momentum going with our booking activity in Europe through the season, so we're pretty happy about that. The pricing has come back to be more moderate to where we were hoping it would be, so check the box on that one. So I would say we're confident with the itineraries that we have around the globe and I guess confirmation of that is seeing our guidance for the rest of the year being right in the same sweet spot."
    • "The Europe market is interesting because the booking volume has really accelerated in the last number of weeks. So we're very encouraged about where we are with Europe vis-a-vis our budget anyway for the rest of the season."

CARIBBEAN

  • WORSE:  Mgmt commentary was much more subdued this time saying bookings are 'ok' and there were several weeks of disappointing results
  • PREVIOUSLY:  "On the margin, the Caribbean, there was just a short period there that it wasn't as strong as we would have liked it. It's back, being booking well. I would say that over the last 10 weeks as an example, we've had very strong bookings other than one week where it was still almost double-digit booking levels. I probably said too much there. But as well, the booking period has extended as well."  

BREAKAWAY

  • SAME:  After a strong start, it looks like Breakaway bookings are now trending below that of Epic in its inaugural year
  • PREVIOUSLY:  
    • "The Breakaway is booking very well. I would say, for the most part, the ships have booked a little bit different according to the time of the year, but right now we're right in the zone of where we were hoping to be, again, which is why we have the confidence with our guidance for the rest of the year.
    • "We're expecting to exceed the onboard experience." 

2014 OUTLOOK

  • SAME:  2014 continues to track ahead on pricing and load factor  
  • PREVIOUSLY:  "We have a higher booked position and at a higher price...we actually have some pretty decent visibility on 2014 and we're feeling pretty confident."

NCLH 2Q 2013 CONFERENCE CALL NOTES

FY 2013 guidance range (mid-point) unchanged but 3Q yield pressured by Alaska 

 

 

"While the addition of Norwegian Breakaway to our fleet was undoubtedly the highlight of the quarter, our strong results, which include our twentieth consecutive quarter of year-over-year Adjusted EBITDA growth, are equally as notable. Other initiatives in the quarter, from the refinancing of certain credit facilities to further optimize our capital structure, to the enhancements carried out on Pride of America at her recent dry-dock, demonstrate our culture of leaving no stone unturned in order to add incremental value for our shareholders and enhance the cruise experience for our guests."

 

- Kevin Sheehan, president and chief executive officer of Norwegian Cruise Line

 

CONF CALL 

  • Breakaway Plus1 -coming 4Q 2015; Plus 2 -coming Spring 2017
  • Guest satisfaction at record levels
  • Tempered expectations 'on the margin'
  • NCC within expectations

Q & A

  • Disappointed with several weeks of bookings (1st-time cruisers slow to book) but believe bookings are back to normal
    • 3Q:  Alaska pressured with more capacity 
    • Caribbean/Bahamas holding on
    • Europe is settling out
    • 3Q/4Q/2014:  feeling pretty good with bookings (higher YoY)
    • Pricing is 'ok' for the rest of the year
  • Onboard revenues were strong - Breakaway had positively impacted #s, casino strength, Breakaway had great business at specialty restaurants; US customers continue to drive onboard spend
  • Breakaway not as positive when compared with Epic's inaugural bookings
  • Some of cruise players are doing more promotions to fill their ships
  • Europe - bottoming out in terms of ticket yield
  • Quantum competition: not worried, New Jersey port is not New York
  • 2013 midpoint expense guidance moved up 50bps - 3 dry docks (new timing), additional advertising for Breakaway
    • Conservative?  Confident on reaching where analysts expect the company to be.
  • Did not reduce headcount through economic downturn
  • Potential secondary offering from Apollo?  No comment
  • FCF - believe in 2H 2014 that stock repurchase is most attractive option

Morning Reads on Our Radar Screen

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

Morning Reads on Our Radar Screen  - Screen Shot 2013 07 29 at 11.17.43 AM

 

 

KEITH McCULLOUGH: CEO

Alwaleed Warns Saudi Oil Minister of Waning Need for Oil

http://www.bloomberg.com/news/2013-07-28/alwaleed-warns-saudi-oil-minister-of-waning-need-for-oil.html

 

Moelis, Rothschild Take Lead on Omnicom-Publicis Merger

http://www.bloomberg.com/news/2013-07-28/moelis-rothschild-take-lead-on-omnicom-publicis-merger.html

 

 

 

HOWARD PENNEY: RESTAURANTS

States that spend the most on fast food

http://finance.yahoo.com/blogs/big-data-download/states-spend-most-fast-food-180357748.html

 

The £250,000 hamburger: First test tube-grown beef will be served in London restaurant this week  

http://www.dailymail.co.uk/sciencetech/article-2380308/250-000-hamburger-First-test-tube-grown-beef-served-London-restaurant-week.html

 

 

 

JOSH STEINER: FINANCIALS

Washington area homes fly off the listings fast

http://www.washingtonpost.com/business/economy/washington-area-homes-fly-off-the-listings-fast/2013/07/26/43245ae8-e8bf-11e2-aa9f-c03a72e2d342_story.html 

 

 

 

TOM TOBIN: HEALTHCARE

Hospital Choices Shrinking

http://www.thesunchronicle.com/news/local_news/hospital-choices-shrinking/article_814d8694-68b9-5fa6-ac56-cb457d320973.html#.UfZQlvl585k.twitter


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next