Takeaway: The impact of Temp hiring on Non-Farm Payrolls growth is very small.
Celebrity is weaker but overall, not much change in trends. We’re still cautious heading into Wave season.
- Caribbean pricing did not move much. Getaway is getting a good premium ahead of its inaugural Caribbean voyages in February 2014.
- Celebrity exhibited pricing weakness across most regions, probably as a tactic in response to the negative publicity stemming from the Celebrity Millennium troubles in Alaska. It remains to be seen whether this is a temporary setback for RCL’s premium brand, which has had a great year. Meanwhile, the RC brand showed strength in its close-in FY 2013 European pricing.
- Costa's 2014 pricing remains steady
Here are some observations from our proprietary pricing survey of >12,000 itineraries. 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. CCL: 6/25; RCL: 7/25; NCLH: 7/29.
- FQ4 close-in pricing remained weak, though it is slightly better than a month ago. FQ1 2014 pricing was moderately lower YoY and FQ2 2014 pricing was flat. Relative trend is stable.
- Costa’s close-in FQ4 pricing of mid-to-upper teens growth continued through August. Early 2014 Costa pricing trend is slightly positive.
- Cunard’s FQ1 pricing is down double digits YoY. Pricing trend remains negative.
- The new ship, Royal Princess, had some discounting for its FQ2 2014 itineraries, relative to July
- AIDA pricing was mixed with Scandinavia/Red Sea itinerary was doing a little better than Western Europe/Eastern Med
- Holland America pricing finally turned around in Alaska, up nicely YoY in FQ2 2014 and FQ3 2014
Asia, Mexico, & South America
- Costa’s and Holland America’s FQ1 2014 pricing trend was flat. Princess’s pricing for its sparse itineraries was slightly positive.
- Carnival pricing was down 14% YoY in FQ4, -3% in FQ1 and flat in FQ2
- Holland America’s pricing trend was flat, while Princess pricing trend was moderately positive
- South America
- Costa’s and Holland America’s pricing trend was flat, while Princess’s pricing trend was slightly positive
- RC brand: YoY pricing for FQ4 and FQ1 were similar to the last pricing update in early August. FQ2 pricing was roughly flat.
- Celebrity: pricing worsened YoY in FQ4 and FQ1. Trend was slightly negative.
- Pullmantur: flat pricing trend
- RC brand: FQ4 close-in pricing was very strong but FQ2 2014 pricing was moderately lower YoY
- Celebrity: FQ2 2014 pricing is down substantially and trend was negative.
- Pullmantur: close-in pricing trend was slightly positive
- Celebrity YoY pricing was 12% lower for F2Q 2014.
Asia and South America
- RC brand, Celebrity, and Azamara pricing were all slightly positive for FQ1-FQ2 2014.
- South America
- Positive RC brand pricing offset by lower Celebrity pricing in 2014
- Close-in pricing was a little better than that seen in early August. FQ1/FQ2 pricing was up slightly.
- Very close-in Breakaway pricing was slightly higher while early FQ 2014 pricing was slightly negative.
- Getaway pricing had a nice 5% uptick in its pricing since early August. It is commanding a 50% premium to Epic and a 10% premium to Sun.
- Flat pricing trend across all durations.
Yesterday the WSJ reported that the FDA is considering a ban on online sales of e-cigs as part of broader regulatory restrictions that are expected to be announced in October.
What’s Our Take?
- It wouldn’t be a huge surprise to see online sales of e-cigs banned. The FDA is well aware how easy it is for consumers to purchase e-cigs online– one simply has to put in a birth date of at least 18 years of age
- The FDA is also concerned with the appeal of flavored e-cig offerings (like bubble gum or coffee) that may attract a younger demographic
- Estimates suggest the online e-cig market to be worth ~$500MM of the total $1-1.5B category
- We expect any restrictions on online sales to favor Lorillard’s Blu e-cig and NJOY (private), the two companies with the greatest retail market share and nationwide presence. [Blu is estimated to have under 20% of its total sale online]
- Additionally, as RAI (Vuse) and MO (Mark-Ten) expand distribution (they’ve rolled out brands in the last two months across test markets in one state each), we’d expect an online ban to benefit big tobacco due to their retail leverage over smaller e-cig players
- We expect future FDA regulatory restrictions to include at least advertising (same or more similar standards to traditional tobacco) and nicotine levels (at most equivalence with traditional tobacco)
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- Eurozone fundamentals inching higher, including stronger PMIs; investor sentiment improving on weak comps. On a relative basis the Eurozone is well below its historical growth average and churning only modestly higher as deep structural imbalances and the lack of credit drag on growth.
- We underline the significance of Eurocrat and ECB resolve to lend support to the region and markets (at all costs), which, along with marginally better data, should continue to support Eurozone capital market performance.
- Bullish position on the UK (etf: EWU) and Germany (EWG) remains.
Yesterday, preliminary August PMIs for the Eurozone, Germany, and France were released, and short of France’s Services figure that contracted month-over-month (and is below the 50 line at 47.7), the European aggregate and Germany numbers are showing 2 year highs, resting above the 50 line.
Eurozone PMI Manufacturing 51.3 AUG (exp. 50.7) vs vs 50.3 JUL
Eurozone PMI Services 51 AUG (exp. 50.2) vs 49.8 JUL
Eurozone PMI Composite 51.7 AUG (exp. 50.9) vs 50.5 JUL
Germany PMI Manufacturing 52 AUG (exp. 51.1) vs 50.7 JUL
Germany PMI Services 52.4 AUG (exp. 51.7) vs 51.3 JUL
France PMI Manufacturing 49.7 AUG (exp. 50.3) vs 49.7 JUL
France PMI Services 47.7 AUG (exp. 49.2) vs 48.6 JUL
What’s Our Read?
Our European call for fundamentals to stabilize remains underway. While we expect protracted below trend growth in the region, the Eurozone Q2 GDP print of +0.3% Q/Q ushered in an end to the 18 month recession, and we’re seeing positive follow-through on the data. Germany is leading the growth charge at +0.7% Q/Q with strong export and import figures (+2.2% and 2.0%, respectively), and we continue to like UK fundamentals – today in a second estimate, Q2 GDP was revised 10bps higher to +0.7% Q/Q.
Yet while there’s optimism to be had on improving data, Eurozone GDP was still down -0.7% year-over-year in Q2 and we expect a very slow churn higher in Eurozone GDP in the balance of 2013 (we are not getting over our ski tips). Certainly GDP will remain well below the pre-crisis average of 2.1% (since 2000) as the region hits the reset button on standards of spending and lending as budgets are readjusted at the government and household levels. We maintain our call for 2013 GDP between -0.8% and -0.6% year-over-year.
Beyond struggling to reset spending and lifestyles habits, here are some significant hurdles that we expect will continue to weigh on Eurozone GDP:
- The slim availability of credit, in particular to the small and medium sized businesses, the core drivers of growth and employment
- Diminished credit quality of banks, especially across the periphery, as they report increasing non-performing loans
- Further bank write-downs of non-performing assets
- Labor market reforms slow to enact or institute at all
- A protracted unemployment overhang, especially youth unemployment across the periphery, that will limit consumer spending and confidence
- Political uncertainty, in Italy (Berlusconi remains the lynchpin), Spain, and Portugal
Into Q4 we expect European PMIs to hover around the 50 line (ups and downs) but not to show a material breakout given the very weak structural issues that we do not see inflecting materially over the intermediate term, including weak credit conditions, high unemployment, alongside political uncertainty at the country level – Italy, Spain, and France in particular. We continue to be fundamentally bullish on German and the UK equities, so should we see any outperformance from PMIs, we would expect it to come from these two countries.
As it relates to the capital markets, we think a much larger force versus marginal improvement in fundamental data is the political resolve of the Eurocrats and Draghi to lend fund if needed (back-pocket OMT ready) and prevent any country from leaving the Eurozone, which we think can continue to stabilize and push markets higher. Already we’re seeing domestic and international investors become increasingly confident in Draghi’s heavy hand and buying distressed asset, for example housing in Spain and bank debt across the periphery, as the EU banking system slowly continues to heal.
Hedgeye Risk Management CEO Keith McCullough delivers his latest market musings and insights during his morning conference call with investors. As usual, he pulls no punches on stocks, bonds and the economy.
Client Talking Points
One of the main reasons why it has been "less easy" to be bullish on the S&P 500 and the Nikkei was that the Yen was stabilizing versus the US Dollar. Not this week. And the Nikkei loved that Yen breakdown of 97.71 support overnight. It busted a big +2.2% move off the @Hedgeye TREND line of 13,330 support. Correlations matter.
#RatesRising remains our top Global Macro Theme for Q3. The 10-year is yielding 2.89% this morning. That's up +6 basis points week-over-week and up +38 basis points year-to-date. Boom. This debate should be moving toward when we hit 4% on the 10-year instead of 3%. If the US Dollar joins this breakout in rates, it will continue to be very bullish for growth investors. Bearish for slow-growth positions like Utilities (XLU). Sell bonds, buy stocks.
One of the nice little perks to a #StrongDollar versus weak Yen is a consumption tax cut via #CommodityDeflation. Both the US Dollar and S&P 500 are up now on the week, but the CRB Index is down -1.7% after failing at our 293 TREND line of resistance. Again, correlations matter. Rinse and repeat.
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Top Long Ideas
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.
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.
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
After a 1.5-3% correction from the YTD highs in the SPY, QQQ, and IWM, I’m seeing the least amount of bulls of the yr
QUOTE OF THE DAY
"We should be dreaming. We grew up as kids having dreams, but now we're too sophisticated as adults, as a nation. We stopped dreaming. We should always have dreams." -Herb Brooks
STAT OF THE DAY
The Indian rupee hit a record low on Thursday at 65.56 per dollar and is down roughly 17% this year. It has overtaken the yen as the world's worst performing major currency this year. #AsianContagion anyone?