prev

All-time Highs: SP500 Levels, Refreshed

Takeaway: If the reaction to the employment report is bullish, 1764 is next; if its bearish, 1712 is next. So #GetActive.

POSITION: 7 LONGS, 5 SHORTS @Hedgeye

 

All-time is a long time. And fighting a setup like this (higher-lows and higher-all-time-highs) is as tough as tough gets. Forget about Fed fighting – don’t fight Mr. Market.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1764
  2. Immediate-term TRADE support = 1712
  3. Intermediate-term TREND support = 1671

 

In other words, the US stock market remains in what we call a Bullish Formation (bullish on all 3 of our core durations – TRADE, TREND, and TAIL). If the reaction to the employment report is bullish, 1764 is next; if its bearish, 1712 is next.

 

So #GetActive.

KM

 

Keith R. McCullough
Chief Executive Officer

 

All-time Highs: SP500 Levels, Refreshed - SPX


SHIPS OF STOOLS NO LONGER? (WITH CHARTS)

CCL looks washed out (as are the bathrooms on the Triumph, finally) while RCL may be the stock at risk.

 

 

This is indeed a pivot for us - we’ve been crapping on CCL all year.  But with most of the issues flushed out, the stock may be bottoming out.  In our latest pricing survey, Europe looks stable and with easy upcoming comps, CCL’s large European exposure should be an asset.  Moreover, CCL is doing better than the competition in Alaska and while the Caribbean outlook is still somewhat cloudy, our pricing survey did not indicate any further deterioration for early 2014 itineraries.  Could we be early?  It’s happened before but the hedge of RCL on the other side might be the solution, for those so inclined to a pair trade.

 

Our pricing survey actually presented a more uncertain 2014 for RCL.  Given RCL’s newfound position as the Cruise bellwether and recent stock appreciation to match, the risks look greater for that stock.  RCL won’t feel the Europe tailwind (“Europe tailwind”? it’s no longer an oxymoron) to the extent of CCL.  Regionally, RCL faces pressure in all of its markets – potentially from CCL’s aggressive marketing strategy.  Pricing is way down in Alaska and Europe and RCL is overexposed to the Caribbean (highest since 2007) where visibility is the lowest.  Sell-side sentiment seems the most bullish in over 2 years.  While valuation is in-line with historical levels, RCL's earnings are at risk.

 

Here are some of the differentiating factors between CCL and RCL:

 

CCL HAS MORE EXPOSURE TO THE EUROPEAN TAILWIND

If the European economies and consumers continue to recover from the depths of a painful recession, Carnival benefits disproportionately given its outsized exposure to Europe and easier comps.  Our macro team is seeing an improved risk climate in the region, which bodes well for Q4 and 2014.  Please see Hedgeye Macro Themes Q4 2013 that presents their view that the environment is ripe for the European consumer – strong currency, growth accelerating and inflation decelerating.  Our Cruise Pricing Survey corroborates the Hedgeye macro view.  We estimate CCL, RCL have 30% and 22% of its itineraries in Europe for 2014, respectively.

 

SHIPS OF STOOLS NO LONGER? (WITH CHARTS) - CRUISE1

 

SHIPS OF STOOLS NO LONGER? (WITH CHARTS) - CRUISE2

 

The British Pound also looks bullish for the consumer.  According to a recent TripAdvisor survey, UK consumers are likely to cut back on daily living expenses to protect their holiday budgets for 2014.  Despite an economy that is still fragile and recovering, this could result in a higher travel budget for some UK consumers.  Carnival’s P&O Cruises UK and Cunard, which accounts for roughly 10% of overall itineraries, could benefit from the UK rebound.

 

PRICING DIVERGENCE IN EUROPE/ALASKA

Our Cruise Pricing Survey is showing quite a divergence in pricing between RCL and CCL brands in Europe and Alaska for 2014.  In Europe, RCL is discounting heavily while most of CCL’s brands are maintaining price.  The discrepancy is more stark in Alaska.  One reason why RCL may be lowering price in Europe could be due to tougher 2014 comps; we believe RCL’s 2H 2013 pricing was strong.  

 

RCL YIELD RISK

One of the primary reasons why many analysts have been so positive on RCL is that they believe the company can achieve +2.5% to 3.0% net constant currency yield for 2014 and beyond.  We believe that Street forecast is too rosy based on early trends from our pricing survey;  +1.0% to +2.0% yield growth is probably more reasonable guidance for 2014 (we’re at +1.7% constant currency net yield).  While it’s true that RCL may get a yield bump in Q4 2014 with the delivery of Quantum of the Seas, the Caribbean is very crowded market and cannibalization remains a risk. 

 

For Carnival, 1H 2014 yield guidance would suggest the lowest net yields seen since 2004.  Unless there is another ship catastrophe, the bottom may finally be in.  We are forecasting +1.5% yield for 2014.  We believe F1Q yields will be the worst, with sequential improvement each subsequent quarter.

 

CCL ESTIMATES FINALLY IN LINE?

We think so.  When Carnival Triumph became kaput in February, the sell-side tried to reassure investors that this was a ‘normal’ ship incident that would only have a temporary adverse effect on the business.  We thought otherwise as we noted in "CHART DU JOUR: CCL: IT COULD GET SMELLIER” (02/14/13) given our concerns of the deterioration of the Carnival brand and that the incident was widely publicized and US-based.  Since then, Carnival has lowered guidance three times and boosted capex to shape-up their ships.  This past quarter, we thought some of the CCL bulls were still too early as we noted in "CCL: IS NOW REALLY THE TIME FOR A VALUATION UPGRADE? (08/15/13).

 

With Wall Street finally pessimistic on CCL (see the Sentiment section below), we think FY2014 estimates are finally achievable and a meet may be good enough for the stock to work.  For FY 2014 EPS, we’re in-line with the Street for CCL at $1.64 and below the Street by 6% for RCL at $2.88.

 

SENTIMENT DIVERGENCE

Sell-side sentiment on CCL appears to be at its lowest since July 2010 as 15% of the analysts have stamped a sell rating on the stock, stemming from a flurry of downgrades following 2014 guidance.  On the other hand, analysts love RCL – the highest % of buy ratings since October 2011.  The upside potential implied by their average price targets has narrowed between the two names – CCL +7% and RCL +9%.   

 

SHIPS OF STOOLS NO LONGER? (WITH CHARTS) - cruise3

 

CONCLUSION

Being contrarian for contrarian sake is not our goal, but when that same contrarian call is backed by catalysts, it becomes compelling.  The RCL/CCL sentiment divergence is as wide as we’ve seen it yet CCL is the one with the better fundamentals, on the margin.  CCL comps are easier and pricing looks more stable than for RCL, particularly in Europe and Alaska.  Europe on the margin is a tailwind and a bigger one for CCL.  Estimates look reasonable – finally – for CCL while we’re below the Street for RCL.  2013’s big cruise stock performance divergence could reverse as we move into 2014.

 


SHIPS OF STOOLS NO LONGER?

CCL looks washed out (as are the bathrooms on the Triumph, finally) while RCL may be the stock at risk.

 

 

This is indeed a pivot for us - we’ve been crapping on CCL all year.  But with most of the issues flushed out, the stock may be bottoming out.  In our latest pricing survey, Europe looks stable and with easy upcoming comps, CCL’s large European exposure should be an asset.  Moreover, CCL is doing better than the competition in Alaska and while the Caribbean outlook is still somewhat cloudy, our pricing survey did not indicate any further deterioration for early 2014 itineraries.  Could we be early?  It’s happened before but the hedge of RCL on the other side might be the solution, for those so inclined to a pair trade.

 

Our pricing survey actually presented a more uncertain 2014 for RCL.  Given RCL’s newfound position as the Cruise bellwether and recent stock appreciation to match, the risks look greater for that stock.  RCL won’t feel the Europe tailwind (“Europe tailwind”? it’s no longer an oxymoron) to the extent of CCL.  Regionally, RCL faces pressure in all of its markets – potentially from CCL’s aggressive marketing strategy.  Pricing is way down in Alaska and Europe and RCL is overexposed to the Caribbean (highest since 2007) where visibility is the lowest.  Sell-side sentiment seems the most bullish in over 2 years.  While valuation is in-line with historical levels, RCL's earnings are at risk.

 

Here are some of the differentiating factors between CCL and RCL:

 

CCL HAS MORE EXPOSURE TO THE EUROPEAN TAILWIND

If the European economies and consumers continue to recover from the depths of a painful recession, Carnival benefits disproportionately given its outsized exposure to Europe and easier comps.  Our macro team is seeing an improved risk climate in the region, which bodes well for Q4 and 2014.  Please see Hedgeye Macro Themes Q4 2013 that presents their view that the environment is ripe for the European consumer – strong currency, growth accelerating and inflation decelerating.  Our Cruise Pricing Survey corroborates the Hedgeye macro view.  We estimate CCL, RCL have 30% and 22% of its itineraries in Europe for 2014, respectively.

 

The British Pound also looks bullish for the consumer.  According to a recent TripAdvisor survey, UK consumers are likely to cut back on daily living expenses to protect their holiday budgets for 2014.  Despite an economy that is still fragile and recovering, this could result in a higher travel budget for some UK consumers.  Carnival’s P&O Cruises UK and Cunard, which accounts for roughly 10% of overall itineraries, could benefit from the UK rebound.

 

PRICING DIVERGENCE IN EUROPE/ALASKA

Our Cruise Pricing Survey is showing quite a divergence in pricing between RCL and CCL brands in Europe and Alaska for 2014.  In Europe, RCL is discounting heavily while most of CCL’s brands are maintaining price.  The discrepancy is more stark in Alaska.  One reason why RCL may be lowering price in Europe could be due to tougher 2014 comps; we believe RCL’s 2H 2013 pricing was strong.  

 

RCL YIELD RISK

One of the primary reasons why many analysts have been so positive on RCL is that they believe the company can achieve +2.5% to 3.0% net constant currency yield for 2014 and beyond.  We believe that Street forecast is too rosy based on early trends from our pricing survey;  +1.0% to +2.0% yield growth is probably more reasonable guidance for 2014 (we’re at +1.7% constant currency net yield).  While it’s true that RCL may get a yield bump in Q4 2014 with the delivery of Quantum of the Seas, the Caribbean is very crowded market and cannibalization remains a risk. 

 

For Carnival, 1H 2014 yield guidance would suggest the lowest net yields seen since 2004.  Unless there is another ship catastrophe, the bottom may finally be in.  We are forecasting +1.5% yield for 2014.  We believe F1Q yields will be the worst, with sequential improvement each subsequent quarter.

 

CCL ESTIMATES FINALLY IN LINE?

We think so.  When Carnival Triumph became kaput in February, the sell-side tried to reassure investors that this was a ‘normal’ ship incident that would only have a temporary adverse effect on the business.  We thought otherwise as we noted in "CHART DU JOUR: CCL: IT COULD GET SMELLIER” (02/14/13) given our concerns of the deterioration of the Carnival brand and that the incident was widely publicized and US-based.  Since then, Carnival has lowered guidance three times and boosted capex to shape-up their ships.  This past quarter, we thought some of the CCL bulls were still too early as we noted in "CCL: IS NOW REALLY THE TIME FOR A VALUATION UPGRADE? (08/15/13).

 

With Wall Street finally pessimistic on CCL (see the Sentiment section below), we think FY2014 estimates are finally achievable and a meet may be good enough for the stock to work.  For FY 2014 EPS, we’re in-line with the Street for CCL at $1.64 and below the Street by 6% for RCL at $2.88.

 

SENTIMENT DIVERGENCE

Sell-side sentiment on CCL appears to be at its lowest since July 2010 as 15% of the analysts have stamped a sell rating on the stock, stemming from a flurry of downgrades following 2014 guidance.  On the other hand, analysts love RCL – the highest % of buy ratings since October 2011.  The upside potential implied by their average price targets has narrowed between the two names – CCL +7% and RCL +9%.   

 

SHIPS OF STOOLS NO LONGER? - cruise3

 

CONCLUSION

Being contrarian for contrarian sake is not our goal, but when that same contrarian call is backed by catalysts, it becomes compelling.  The RCL/CCL sentiment divergence is as wide as we’ve seen it yet CCL is the one with the better fundamentals, on the margin.  CCL comps are easier and pricing looks more stable than for RCL, particularly in Europe and Alaska.  Europe on the margin is a tailwind and a bigger one for CCL.  Estimates look reasonable – finally – for CCL while we’re below the Street for RCL.  2013’s big cruise stock performance divergence could reverse as we move into 2014.


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD

Takeaway: The Washington-fueled global rally was as impressive as it was predictable. Now it's back to fundamentals over the short/intermediate term.

Risk Monitor / Key Takeaways:

The global rally fueled by the last-minute US debt ceiling increase was impressive. Anyone who still falls into the "de-coupling" camp would have a hard time arguing with the reality of last week's impressively high global/asset class correlation.

 

It's worth a quick mention that our proxy for risk throughout the dislocation was the interbank overnight markets, which showed consistent calm in the face of relentless media EOW coverage. The interbank measures, namely TED-Spread & Euribor-OIS, are building an increasingly reliable track record of throwing off correct signals without false errors. We profile them every week in our risk monitor.

 

Here are a few of the notable takeaways.

 

 

* Sovereign CDS – Sovereign swaps were tighter around the globe last week with the sole exception of the US, where swaps were flat at 34 bps. The real takeaway is the MoM change, particularly in Europe. Consistent with our 4Q13 macro theme of #EuroBulls, Portugal, Spain and Italy are tighter MoM by 136 bps, 35 bps and 33 bps, respectively. 

 

* European Financial CDS - Europe continues to dazzle. Only two EU financials widened last week, RBS (+1 bp) and Banco Popular (+19 bps). The rest of Europe was notably tighter. This continues a theme that's been in place for some time now. In fact, looking at the MoM trend, the mean/median change in EU financial CDS is tighter by 31/8 bps, respectively. 

  

* 2-10 Spread – Last week the 2-10 spread tightened to 227 bps, -7 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

* High Yield – High Yield rates fell 25.2 bps last week, ending the week at 5.99% versus 6.24% the prior week.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 9 of 13 improved / 1 out of 13 worsened / 3 of 13 unchanged

 • Long-term(WoW): Negative / 2 of 13 improved / 2 out of 13 worsened / 9 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 15

 

1. U.S. Financial CDS -  It was a clean sweep for US Financials last week, with swaps tightening across the board as the government finally got its act together. The mean/median tightening across the sector was 20/13 bps, respectively. The most improved were MS, MBIA and MTG. 

 

Tightened the most WoW: MTG, MBI, MS

Widened the most/ tightened the least WoW: GNW, GNW, RDN

Tightened the most WoW: AXP, MS, ALL

Widened the most MoM: MBI, RDN, AGO

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 1

 

2. European Financial CDS - Europe continues to dazzle. Only two EU financials widened last week, RBS (+1 bp) and Banco Popular (+19 bps). The rest of Europe was notably tighter. This continues a theme that's been in place for some time now. In fact, looking at the MoM trend, the mean/median change in EU financial CDS is tighter by 31/8 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 2

 

3. Asian Financial CDS - Tighter. Only Japan's Matsui was wider on the week (+3 bps). Chinese and Indian bank swaps were tighter across the boards, as were Japanese banks with the exception of Matsui.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 17

 

4. Sovereign CDS – Sovereign swaps were tighter around the globe last week with the sole exception of the US, where swaps were flat at 34 bps. The real takeaway is the MoM change, particularly in Europe. Consistent with our 4Q13 macro theme of #EuroBulls, Portugal, Spain and Italy are tighter MoM by 136 bps, 35 bps and 33 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 18

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 3

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 25.2 bps last week, ending the week at 5.99% versus 6.24% the prior week.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1811.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 6

 

7. TED Spread Monitor – The TED spread rose 3.0 basis points last week, ending the week at 21.6 bps this week versus last week’s print of 18.56 bps.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 7

 

8. CRB Commodity Price Index – The CRB index rose 0.5%, ending the week at 287 versus 286 the prior week. As compared with the prior month, commodity prices have decreased -1.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread was unchanged last week at 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. 

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 6 basis points last week, ending the week at 3.04% versus last week’s print of 3.10%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 10

 

11. Markit MCDX Index Monitor – Last week spreads widened 12 bps, ending the week at 89 bps versus 101 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 11

 

12. Chinese Steel – Steel prices in China fell 0.2% last week, or 7 yuan/ton, to 3499 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 12

 

13. 2-10 Spread – Last week the 2-10 spread tightened to 227 bps, -7 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.8% upside to TRADE resistance and 2.8% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: ONWARD & UPWARD - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


MACAU ON TRACK FOR ~30% YOY GROWTH

Another solid week out of Macau, albeit slower as expected as we move farther away from the holiday.  While average daily table revenues declined 15% from the prior week, on a YoY basis, ADTR grew 26%.  We’re currently projecting full month GGR (including slots) to grow 29-33% YoY.

 

In terms of market share, LVS and MGM continue to lag in October.  We’re hearing both are suffering from low relative hold.  We would argue that LVS will resume market share gains through the most of next year while MGM should struggle to hold its own.  Galaxy and SJM are having great months with share above recent trend.

 

What can slow the Macau mo?  We don’t see any big negative near-term catalysts although comparisons do get more difficult.  November, while strong, should show decelerating YoY growth and December may fall back into the mid-teens.

 

MACAU ON TRACK FOR ~30% YOY GROWTH - macau1

 

MACAU ON TRACK FOR ~30% YOY GROWTH - MACUA2


China Follows Through

Client Talking Points

CHINA

Witness the solid market follow through following Friday’s China #GrowthStabilizing data for Q313 and September. The Shanghai Composite closes up another +1.6% overnight, leading Asian Equities. Look, if China bases here on the growth curve, an acceleration in 2014 could be next. We're watching this closely here.

GERMANY

Here's a straightforward equation for you: #StrongEuro = Strong Germany. Nope, you won’t get that from your Keynesian textbook (which is precisely why its truth). German PPI (producer prices) came in NEGATIVE in September at -0.5% year-over-year. Guess what? That is fantastic news for German producer margins. For more on this see our #EuroBull Macro theme deck

UST 10YR

It's game time going into the jobs report (tomorrow) with the 10-year yield sitting right on @Hedgeye TREND line support of 2.58%. We have no position into going into this print. Why? We have no idea what this report will bring. Incidentally, Ben Bernanke wants to lean on the yield curve regardless, pandering the to the perma bond bull lobby not to taper. 

Asset Allocation

CASH 44% US EQUITIES 16%
INTL EQUITIES 22% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 

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.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

Is the Italian 10yr going to drop below 4%? 4.18% last

QUOTE OF THE DAY

Remember that not getting what you want is sometimes a wonderful stroke of luck. –Dalai Lama

STAT OF THE DAY

In the first nine months of the year, global high-yield-bond issuance reached $378.2 billion, up by 27% on the same period in 2012, according to Dealogic, a financial-data firm.


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.63%
next