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CCL: 2014 LISTING TO THE DOWNSIDE

FY2013 should be ok but what about 2014?

 

 

Our pricing survey indicates some Caribbean weakness for the Carnival brand particularly FQ1 2014.  CCL reports FQ3 earnings next Tuesday morning.  We expect CCL to report at the upper end of its net yield guidance (-3.5% to -4.5%) and tighten its FY 2013 yield guidance (-2% to -3%).  While Carnival brand pricing in the Caribbean remains stubbornly low, we believe management had already taken the significant discounting into account for FY 2013.  However, the Street may be underestimating the potential for significant weakness in Carnival brand pricing for FQ1 2014.   In fact, we are projecting FQ1 EPS and yields of $0.05 and 0.6%, respectively, well below the Street at $0.16 and 2.0%.

 

Management may point to better pricing growth in the summer but we think it’s too early as wave season is not for a few months.  For the full year of fiscal 2014, we’re projecting $2.09 versus the Street at $2.22.  Wave season risk is high next year, as are fuel prices.

 

Bunker fuel mix prices (80% IFO 380, 3% IFO 180, 17% MGO) have gained 4% since Carnival issued guidance.  We estimate higher fuel prices and adverse FX has cut 2H 2013 EPS by 4 cents.

 

At an expensive forward valuation at 18x 2014 EPS - 1.4x above its 5-year average – Carnival is trading at a level that suggests a full pricing recovery in FY2015.  The coast is definitely not clear yet, particularly in the Caribbean.


INITIAL CLAIMS: QE IMPLICATIONS

Takeaway: The historical relationship between Fed purchases and initial jobless claims is strong. We consider the implications below.

Our base framework for looking at countries from a macro perspective is our GIP (Growth/Inflation/Policy) model.

 

It allows us to analyze a country as we would a company and provides a tractable framework for contextualizing how marginal macro data and policy decisions are likely to impact the slope of the revenue and margin lines (Ie. Growth/GDP and Inflation) at the sovereign level. 

 

Our bull case on U.S. growth in 2013, in terms of our most basic US dollar based economic flow model,  looked something like this:

 

$USD Higher --> Energy/Commodities/Inflation lower --> Real Growth Higher  --> Pro-Growth Equities Exposure Outperformance

 

Left to itself, we think this flow sets the stage for positive macro reflexivity and some sustainable economic & market mojo.  Of course, policy is the other dynamic variable and, depending on its flavor, can work to catalyze, amplify, or reverse the trajectories of growth and inflation (and equity, bond and currency values by extension).   

 

The Fed and congress were largely non-existent in the first 8 months of the year and all was mostly quiet on the policy front – that was a good thing for the markets, organic macro trends, and main street confidence. 

 

With Bernanke back to perpetuating uncertainty/volatility yesterday and Congress back from recess and promising to save us from their next self-created crisis, the threat is that the above cycle – and the reason we’ve remained positive on the domestic growth outlook – reverses.   We’ve obviously seen this movie before as the aforementioned cycle and its converse have played out recurrently over the last four years.  

 

As it stands currently, the strength the of economic data continues to belie the Fed’s wimpish policy stance.   Labor Market and Consumer Confidence trends remain strong, ISM figures hit multi-year highs in the latest report, and Existing Home Sales and the Phili Fed trounced expectation this morning. 

 

What does that mean within the context of the emergent policy (monetary and fiscal) dynamics.  Right here, we don’t have a convicted call. 

 

Maybe Bernanke doomed us to another compressed economic cycle yesterday, maybe congress will amplify market volatility again over the next month,  maybe positive organic macro trends are healthy enough to persist in the face of a policy headwind, maybe Grand Theft Auto sales will take GDP & real final sales to +5% in 3Q.  The Risk Management business may be confounding at times, but it’s not boring…… 

 

Below is the breakdown of this morning's claims data, along with an analysis of the historical relationship between Claims and Fed Purchases, from the Hedgeye Financials team.  If you would like to setup a call with Josh or Jonathan or trial their research, please contact .

 

- Hedgeye Macro 

 

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Will This Time be Different?

In light of yesterday's announcement by the Federal Reserve that they will not begin tapering QE asset purchases, we thought it would be helpful to evaluate the historical relationship of QE and initial jobless claims. The chart below looks at the Fed's holdings of Treasury and Agency securities on the x-axis and compares those against corresponding levels of initial jobless claims (SA, rolling) on a zero lag basis. The time period is 2009-Present and the data points are weekly. We're using a second order polynomial (i.e. parabolic) regression here to reflect the fact that the level of jobless claims begins to reach frictional resistance below 300k. The equation of the line is shown in the chart for anyone who wants to run their own assessment. Assuming the Fed remains unchanged in its purchases for a further 6 months, which is what we would argue the market likely now assumes, the relationship suggests that we could expect to see claims running in the 275k range by March/April of next year. We're assuming $85bn/mo for 6 months would bring total Fed holdings to just under $4 Trillion.

 

Assuming their is a causal relationship here and assuming that it persists going forward, this would be very good news for lenders from a credit standpoint. One of our central tenets on COF has been that the labor market is getting better at a faster rate than people realize. This would certainly be consistent with that viewpoint. 

 

While we're personally disappointed in the Fed's decision, the game is what it is, and this has been the historical relationship between claims and Fed securities holdings, i.e. QE. Rather than fight the logic of the decision, we'll look to profit from understanding its implications.

 

INITIAL CLAIMS:  QE IMPLICATIONS - JS 3

 

 

The Data

Prior to revision, initial jobless claims rose 17k to 309k from 292k WoW, as the prior week's number was revised up by 2k to 294k.

 

The headline (unrevised) number shows claims were higher by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7k WoW to 314.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -16.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -14.3%.

 

INITIAL CLAIMS:  QE IMPLICATIONS - JS 1

 

INITIAL CLAIMS:  QE IMPLICATIONS - JS 2

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Shame on You, Ben Bernanke

By Keith McCullough

 

“Insanity: doing the same thing over and over again, and expecting different results.” -Albert Einstein

 

Albert Einstein’s famous quote on insanity is rather apropos today in light of the Bernanke Fed’s shameful decision to shirk its duties and avoid tapering yesterday.

 

As I wrote in my morning newsletter, I’m going to keep this missive tight. Because if I really ranted about what I really think about what Ben Bernanke just did failed to do, I might lose some of my firm’s clients and have the NSA parked outside of my house.

 

Moving on.

 

Shame on You, Ben Bernanke - deba

 

Here are some quick observations regarding the implications of the Fed’s unfathomable dereliction of duty.

  • The US Dollar has been bloodied. It has been beaten down to 3 month lows by our un-elected, unaccountable, Fed Chief. Thanks Ben.
  • Bernanke just confused every Institutional portfolio manager I talk to. Implied volatility is going up on this decision. You can take that to the bank.
  • Unsurprisingly, Asia ripped higher on Down Dollar. India up +3.7%, Indonesia up +4.7%, Thailand up +3.8%. Nikkei up+1.8%. Other Emerging Markets that love this US Dollar Debauchery? Take a look at Turkey. It shot up +7.6%.
  • Witness the new highs in Europe. It’s across-the-board for the majors; FTSE  up +1.4%, DAX up 1.2%.
  • Vladimir Putin? He loves Bernanke’s Dollar Debauchery. That’s a no-brainer. It lines his pockets. It means up Oil. Russia up almost 4%. Just great. Got #CommodityInflation?
  • The good news is that if you’re a gold bug, Bernanke may have saved your precious metal from totally crashing to earth (at the expense of the purchasing power of the American people). The bad news is our Fed overlords have decided to keep the oppressive oil tax intact on average Americans at the pump (Down Dollar, Up Oil). No, not good.
  • Growth, as an investment style factor, has been smoking slow-growth in 2013 year-to-date. That may very well change now. More to be revealed.

Bottom line: It was a great day for US stock market bulls. But a very sad day for America.

 

Keith McCullough is the founder and CEO of Hedgeye Risk Management.


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Shame on You, Ben Bernanke

“Insanity: doing the same thing over and over again, and expecting different results.” -Albert Einstein

 

Albert Einstein’s famous quote on insanity is rather apropos today in light of the Bernanke Fed’s shameful decision to shirk its duties and avoid tapering yesterday.

 

As I wrote in my morning newsletter, I’m going to keep this missive tight. Because if I really ranted about what I really think about what Ben Bernanke just did failed to do, I might lose some of my firm’s clients and have the NSA parked outside of my house.

 

Moving on.

 

Shame on You, Ben Bernanke - deba

 

Here are some quick observations regarding the implications of the Fed’s unfathomable dereliction of duty.

  • The US Dollar has been bloodied. It has been beaten down to 3 month lows by our un-elected, unaccountable, Fed Chief. Thanks Ben.
  • Bernanke just confused every Institutional portfolio manager I talk to. Implied volatility is going up on this decision. You can take that to the bank.
  • Unsurprisingly, Asia ripped higher on Down Dollar. India up +3.7%, Indonesia up +4.7%, Thailand up +3.8%. Nikkei up+1.8%. Other Emerging Markets that love this US Dollar Debauchery? Take a look at Turkey. It shot up +7.6%.
  • Witness the new highs in Europe. It’s across-the-board for the majors; FTSE  up +1.4%, DAX up 1.2%.
  • Vladimir Putin? He loves Bernanke’s Dollar Debauchery. That’s a no-brainer. It lines his pockets. It means up Oil. Russia up almost 4%. Just great. Got #CommodityInflation?
  • The good news is that if you’re a gold bug, Bernanke may have saved your precious metal from totally crashing to earth (at the expense of the purchasing power of the American people). The bad news is our Fed overlords have decided to keep the oppressive oil tax intact on average Americans at the pump (Down Dollar, Up Oil). No, not good.
  • Growth, as an investment style factor, has been smoking slow-growth in 2013 year-to-date. That may very well change now. More to be revealed.

Bottom line: It was a great day for US stock market bulls. But a very sad day for America.


E-Cigarette Industry Insights From Victory CEO

On Tuesday we hosted an expert call on electronic cigarettes featuring Brent Willis, CEO of Victory Electronic Cigarettes. Below we summarized Brent’s key industry insights from the call and encourage you to listen to the call replay (~ 50 minutes) as he provides great insight into the rapidly evolving electronic cigarette story that his company is a part of. Here are the links to the replay podcast and presentation

  

We remain very bullish on the evolving electronic cigarette category. We believe e-cigs offer a compelling alternative to traditional cigarettes and offer the consumer a much different experience than a nicotine patch or gum. There has been a rapid pace of innovation, which, along with increased marketing and distribution, is bringing significant awareness to the category.

 

Industry estimates suggest that U.S. e-cigs sales were $150 Million in 2011, $500 Million last year, may reach between $1-2 Billion this year, and are poised to double in the coming years. We believe Big Tobacco’s involvement in the category – beginning with Lorillard and the launch of its brand Blu in April of last year to Reynolds American and Altria introducing their own e-cig versions over the last two months – should lend credibility to the category and accelerate growth. We expect e-cigs to be margin-enhancing to the combined cigarette category and 2014 to be a breakout year.

 

Globally we believe there’s a huge runway of opportunity for large and small e-cig manufacturers, as competition across the category is fragmented and brand development is in its infancy. While we believe that pending regulation from the FDA may come down on online sales and flavored varieties, we expect that e-cig consumption will continue to grow as consumers seek healthier alternatives to traditional cigarettes and given the significant price point advantage of e-cigs to traditional cigarettes. The data is already showing encouraging signs of strong repeat purchase behavior.

 

We are excited about the developing investment opportunities as this category gains visibility.

 

 

Summary of Industry Notes from our call with Victory CEO Brent Willis:


The Opportunity for E-Cigs

  • Unequivocally a healthier alternative to tobacco cigarettes
  • Huge opportunity to eclipse traditional tobacco: 90% of smokers have yet to try e-cigs
  • Highly attractive for retailers based on margin
  • Expects imminent development of next generation products that are more cigarette-like in form and function
  • Believes that because the category is so new, no one really has a brand. Currently, purchase behavior is primarily driven by what’s available
  • Data suggests that consumers score brands based on flavor profiles
  • On affordability, e-cigs are typically 30-40% more affordable than traditional cigarettes
  • Highly fragmented competition creates opportunity
  • > 30% of smokers report “trying to quit” each year

Traditional Tobacco vs. E-cigs

  • Traditional cigarettes category: over 1.3 Billion smokers globally, worth $720 Billion
    • 60 Million smokers in the U.S., $91 Billion category
    • In the U.S., 1 in 4 adults smokes
    • Asia (Japan and Korea in particular) has some of the highest incidence of smoking in the world, 8 of 10 smoke
    • > 6 Million people die each year from tobacco related diseases (a recent study suggested that if all smokers switched to e-cigs the number would go down to 600)
    • 60% of teens have tried cigarettes before they graduate high school in the U.S. and 20% of teens worldwide smoke
  • E-cig category: untapped in most markets globally = huge runway
    • U.S. sales now exceed $1 Billion, doubling every year
    • Volume sources = 99% of existing smokers that are “trying to quit”
    • 90% of consumers have never tried the category. The current trial rate of ~10% is consistently expanding, from around 2.6% “ever tried” at the end of 2010
    • Recent studies show that e-cigs are contributing to cessation of smoking, with up to 20% of smokers quitting completely and >  50% reducing cigarette consumption
    • Reductions in smoking related deaths should continue to propel the e-cig category

On Regulation

  • The reality is that the influence that regulation will have on the category is still unknown, worldwide
  • The e-cig industry has an industry association (TVECA) that is highly active and represents the category well
  • The FDA is potentially considering to regulate/propose restrictions on:  online commerce; flavor; age; communication; and safety/health certifications
    • While Brent has no knowledge on where the FDA will come down on restriction for the category, he has not heard that one of its considerations is an excise tax on e-cigs or a ban on areas where they may be smoked
    • Brent believes any restrictions will impact everyone in the category in the same way, but that the category is here to stay because of the huge consumer proposition of a healthier alternative to traditional cigarettes

On What’s Driving Consumer Behavior

  • Product mimics the smoking behavior, it’s the same experience (hand-to-mouth) without the “cancer causing ingredients in tobacco” (on average traditional tobacco has 4,000 chemicals vs e-cigs with 4 ingredients)
  • Over time as e-cig products develop, and offerings are even more like traditional cigarettes in terms of form, function, performance, and delivery, that’s when the category will really start to take off
  • Negative health effects of tobacco are clear to the public: cancer and heart disease; dramatic tax increases; health care premium increases; public bans; social stigma; and employer mandated cessation
  • E-cigs are the first truly new CPG category in more than a decade. It’s the first real consumer alternative
  • Compared to traditional cigarettes, e-cigs offer the same pleasurable experience, both physical and psychological; are non-carcinogenic; cost less; and reduce the social burden

Industry Outlook

  • Expects that technical performance changes and enhancement of e-cigs will propel the growth in the category even faster than current growth estimates
  • Opportunity is global and only now in an early stage, untapped in most markets internationally; there’s national distribution in the U.S., but huge opportunities for fragmented competition to take market share 

 

DISCLOSURE: Victory (ECIG) is a newly-public company with limited trading history and liquidity. Hedgeye has no investment opinion on Victory and no current plans to publish research on the company.   Certain Hedgeye executives may at some point become involved in a transaction with Victory or related entities.   This presentation is for information purposes only.

 

 

Matthew Hedrick

Senior Analyst


Jobless Claims: Right Direction

Takeaway: Jobless claims are still moving in the right direction.

Prior to revision, US initial jobless claims rose 17,000 to 309,000 from 292,000 week-over-week (WoW), as the prior week's number was revised up by 2,000 to 294,000.

 

The headline (unrevised) number shows claims were higher by 15,000 WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7,000 WoW to 314,500.

 

The 4-week rolling average of Non Seasonally Adjusted claims (NSA), which we consider a more accurate representation of the underlying labor market trend, was -16.3% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -14.3%.

 

Bottom line is jobless claims are still moving in the right direction.

 

Jobless Claims: Right Direction - stein2

 

Jobless Claims: Right Direction - stein3


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