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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – July 30, 2013


As we look at today's setup for the S&P 500, the range is 20 points or 0.38% downside to 1679 and 0.81% upside to 1699.                              

                                                                                               

SECTOR PERFORMANCE


THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.28 from 2.29
  • VIX closed at 13.39 1 day percent change of 5.27%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC retail sales
  • 8:55am: Redbook weekly retail sales
  • 9am: S&P/Case Shiller Home Prices M/m, May, est. 1.45%
  • 9am: S&P/Case Shiller Index, May (prior 152.37)
  • 10am: Conference Board Consumer Conf Index, July, est. 81
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 4:30pm: API crude, oil product inventories 

GOVERNMENT:

    • President Obama travels to Tenn. to speak on U.S. economy
    • FOMC begins 2-day closed mtg on interest rates, 9am
    • CFTC rules for procedures to establish appropriate minimum block sizes for large notional off-facility swaps and block trades become effective
    • Senate Banking Cmte hears from SEC Chairman Mary Jo White, CFTC Chairman Gary Gensler on limiting systemic risk in financial markets, 10am
    • Gina McCarthy gives first speech since becoming EPA chief
    • Senate confirms James Comey as new FBI director

WHAT TO WATCH

  • JPMorgan accused of gaming energy bids, FERC settlement looms
  • Barclays to raise GBP5.8b in rights offering
  • Pfizer 2Q adj. EPS beat as co. prepares to split units
  • Uralkali sees potash price slump after exiting BPC venture
  • UBS to buy back Swiss central bank’s fund to boost equity
  • Time Warner Cable-CBS talks pass deadline without blackout
  • General Growth to sell its stakes in Aliansce for $690m
  • Centrica buys Hess’s Energy Marketing business
  • Zynga said to lose three top executives after CEO change
  • Deutsche Bank 2Q net misses ests. on legal costs
  • Alcatel-Lucent beats ests. as Qualcomm to buy stake
  • Lockheed said to reach agreement w/Pentagon on 71 more F-35s
  • Moore said to hear Canada wireless concerns about Verizon
  • Tourre rests defense in SEC case w/out calling any witnesses

     EARNINGS:

  • Aetna (AET) 6am, $1.40
  • Nielsen Holdings (NLSN) 6am, $0.49
  • Westlake Chemical (WLK) 6am, $1.98
  • Mednax (MD) 6am, $1.36
  • Generac Holdings (GNRC) 6am, $0.76
  • MDC Holdings (MDC) 6am, $0.58
  • Lexicon Pharmaceuticals (LXRX) 6am, $(0.06)
  • Harris (HRS) 6:30am, $1.15
  • Pitney Bowes (PBI) 6:30am, $0.44
  • RR Donnelley & Sons (RRD) 6:30am, $0.41
  • Waddell & Reed Financial (WDR) 6:59am, $0.64
  • Merck & Co (MRK) 7am, $0.82 - Preview
  • Discovery Communications (DISCA) 7am, $0.91
  • National Oilwell Varco (NOV) 7am, $1.33
  • Thomson Reuters (TRI CN) 7am, $0.45
  • Corning (GLW) 7am, $0.31
  • Coach (COH) 7am, $0.89 - Preview
  • Fidelity National Information Services (FIS) 7am, $0.70
  • Rockwell Automation (ROK) 7am, $1.39
  • Entergy (ETR) 7am, $1.15
  • Cobalt International Energy (CIE) 7am, $(0.15)
  • Alliance Data Systems (ADS) 7am, $2.30
  • Western Union (WU) 7am, $0.34
  • TRW Automotive Holdings (TRW) 7am, $1.69
  • Xylem (XYL) 7am, $0.44
  • Goodyear Tire & Rubber (GT) 7am, $0.48
  • Aegerion Pharmaceuticals (AEGR) 7am, $(0.62)
  • Office Depot (ODP) 7am, $(0.10)
  • Boyd Gaming (BYD) 7am, $0.00
  • Senior Housing Properties Trust (SNH) 7:01am, $0.44
  • Affiliated Managers Group (AMG) 7:10am, $2.10
  • MeadWestvaco (MWV) 7:15am, $0.28
  • Occidental Petroleum (OXY) 7:30am, $1.60
  • NextEra Energy (NEE) 7:30am, $1.28
  • Cummins (CMI) 7:30am, $1.98
  • Waste Management (WM) 7:30am, $0.55
  • Public Service Enterprise Group (PEG) 7:30am, $0.45
  • Vishay Intertechnology (VSH) 7:30am, $0.22
  • JetBlue Airways (JBLU) 7:30am, $0.14
  • Arch Coal (ACI) 7:30am, $(0.33) - Preview
  • TransAlta (TA CN) 7:44am, $0.18
  • U.S. Steel (X) 7:45am, $(0.78)
  • HCP (HCP) 8am, $0.74
  • George Weston (WN CN) 8am, $1.10
  • UDR (UDR) 8am, $0.34
  • 3D Systems (DDD) 8am, $0.24
  • Amgen (AMGN) 4pm, $1.74 - Preview
  • Fiserv (FISV) 4:01pm, $1.44
  • Canadian Oil Sands (COS CN) 4:01pm, $0.52
  • Kimco Realty (KIM) 4:01pm, $0.33
  • Chicago Bridge & Iron (CBI) 4:01pm, $1.01
  • Hanesbrands (HBI) 4:01pm, $0.94
  • IAC/InterActiveCorp (IACI) 4:01pm, $0.94
  • American Capital (ACAS) 4:01pm, $0.24
  • Questcor Pharmaceuticals (QCOR) 4:01pm, $1.04
  • NCR (NCR) 4:02pm, $0.66
  • Covance (CVD) 4:03pm, $0.77
  • ONEOK Partners (OKS) 4:05pm, $0.54
  • ONEOK (OKE) 4:05pm, $0.28
  • Trimble Navigation (TRMB) 4:05pm, $0.37
  • Axis Capital Holdings (AXS) 4:05pm, $0.48
  • Riverbed Technology (RVBD) 4:05pm, $0.22
  • Take-Two Interactive Software (TTWO) 4:05pm, $(0.56)
  • InvenSense (INVN) 4:05pm, $0.14
  • Symantec (SYMC) 4:07pm, $0.36
  • Aflac (AFL) 4:09pm, $1.51
  • Verisk Analytics (VRSK) 4:10pm, $0.53
  • Genworth Financial (GNW) 4:10pm, $0.29
  • Arthur J Gallagher (AJG) 4:10pm, $0.70
  • Access Midstream Partners (ACMP) 4:15pm, $0.31
  • Fortinet (FTNT) 4:15pm, $0.10
  • Oil States International (OIS) 4:16pm, $1.51
  • Weatherford International (WFT) 4:38pm, $0.15
  • Duke Realty (DRE) 4:45pm, $0.26
  • Equity Residential (EQR) 4:58pm, $0.71
  • Lundin Mining (LUN CN) 5pm, $0.05
  • Boston Properties (BXP) 5:09pm, $1.27
  • SM Energy (SM) Aft-mkt, $0.77

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • WTI Falls to Three-Week Low as U.S. Economic Growth Seen Slowing
  • Gold Loss to Platinum Widening for Best Forecasters: Commodities
  • JPMorgan Accused of Gaming Energy Bids as FERC Settlement Looms
  • Wheat Rises on Indications of Revived Demand From Japan to Egypt
  • Copper Falls as Growth Misses Targets in Most Chinese Provinces
  • Einhorn’s Reinsurer Says It Cut Gold Holding Amid Bear Market
  • Uralkali Breaks Potash Cartel to Grab Market Share on Price Drop
  • Food-Grain Harvest in India Seen at Record on Monsoon Rainfall
  • Raw Sugar Climbs to Four-Week High on Demand, Frost; Cocoa Slips
  • Crude Inventories Decline a Fifth Week in Survey: Energy Markets
  • Rebar Trades Near Three-Week Low as Construction Slows in Summer
  • China Steel Stockpiles Seen Nearing 2012 Levels as Output Slows
  • China Iron Ore Production Jumps 10.7% in June: BI Chart
  • Regulators Face Scrutiny on Banks’ Commodities at Senate Hearing

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

 

 

 

 

 

 

 

 

 

 

 


BYD YOUTUBE

In preparation for BYD's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

YOUTUBE FROM Q1 CONFERENCE CALL

  • "We are cautiously optimistic about the economic trends that have started to form late in the quarter and the overall direction of our business."
  • "We are optimistic that conditions should remain relatively healthy in our Midwest and South markets in the months ahead."
  • "In Atlantic City, the recovery from Sandy appears to be strengthening as the market enters its historically busy summer season."
  • "We are well positioned take advantage of several significant long-term growth opportunities, including our agreements with the Wilton Rancheria tribe in Northern California and Sunrise Sports Entertainment in South Florida. Both of these partnerships could provide significant growth opportunities to our company in the next several years."
  • "We're also quite optimistic about the potential of the emerging domestic online gaming market. We intend to be among the first to offer online gaming in the State of New Jersey and are confident that the Borgata brand will allow us to capture a substantial share of this lucrative market. We're evaluating the opportunity to offer online poker in Nevada as well and are determining the best way to enter what is shaping up to be a robust yet crowded market."
  • [LV Locals] "Our themed slot initiatives and related marketing programs that we discussed on prior calls have been quite successful. Looking ahead, we are optimistic about our prospects in the second quarter, which got off to a good start at the Orleans with a festival celebrating the American Country Music Awards."
    • "On a spend per visitor basis, we're running about flat, so sort of an improvement over the declines we had seen prior."
  • [Downtown LV] "We are diligently focused on improving operating margins in this segment as well, and we're successful in mitigating the impact of lower revenues on the EBITDA line...Overall direction of our Downtown Las Vegas business remains encouraging. We continue to enjoy a great relationship with our Hawaiian customers, providing this business a solid foundation."
  • [Kansas Star] "Marketing spend was unusually low during Kansas Star's introductory period in early 2012, and this quarter's results reflect more realistic customer reinvestment levels. We expect these trends to continue and visitation should grow further with the opening of our arena, capable of seating over 6,000 guests. This property continues to perform in line with our expectations and remains on track to generate about $100 million in EBITDA on an annual basis."
  • "We expect wholly-owned EBITDA after the deduction for corporate expense to be in the range of $132 million to $137 million. We expect Borgata to generate EBITDA of $27 million to $29 million in the second quarter. Assuming a tax rate of 35% and with this range of EBITDA guidance, adjusted EPS for the second quarter is expected to range from a loss of $0.02 per share to an income of $0.03 per share." 
  • [Capital allocation]  "BYD monetizing some non-core assets as we've done recently and focus on improving our core operations. We frankly think the most efficient way to continue to de-lever and strengthen our financial position is through improved operations, and so that's our number one focus."
  • "Suppose if the Penn REIT came forward and wanted to pay us REIT multiples 12x or better, we'd probably take a look at it. But that hasn't happened."
  • "Kansas Star today has 150-hotel rooms in total. We'll be increasing that to 300 in the next 18 months or so per our agreement with the state and our hotel operator."
  • [IP] "I would tell you that the market is certainly, as we knew going in, a very, very competitive market. State of Mississippi issues numbers by sort region within the state and you have those handy. And the IP for us has been much more of an efficiency story than a revenue growth story, and we think as a result of that it has had a meaningful contribution to stock price and equity valuation, because we bought it at the right price and very much improved margins and EBITDA contribution at that property, and expect that to continue."

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 

 


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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 .

 

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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


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."

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