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CAKE: PROVING ITS METTLE

CAKE reported fairly impressive 3Q13 results last night.  Despite the recent weakness surrounding the casual dining industry, the company was able to beat expectations during the quarter.

 

CAKE reported 3Q13 EPS results in which revenues and EPS both surprised to the upside.  For the quarter, the company benefited from cost of sales (24% vs. 24.2% estimate), as grocery costs, dairy prices and a shift in bakery mix were all favorable.  Other operating expenses also came in stronger than expected (24.3% vs. 24.9% estimate), due to favorable timing of certain expenses, leverage on rent expense and more efficient production in bakery facilities.

 

Comparable-restaurant sales were strong, as both total comps (+0.8% vs. +0.4% estimate) and Cheesecake Factory comps (+1.0% vs. +0.5% estimate) beat the numbers.  This comes despite lapping the most difficult comps of 2013.  Grand Lux Café comparable sales disappointed (-2.6% vs. -0.1% estimate), as they appear to have trended more in line with anemic casual dining trends.

 

4Q13 guidance was generally held flat, as management expects EPS to come in between $0.57-0.60 on +1.5-2.5% comps.  The outlook for FY14 is a different story, however, as management guided down FY14 EPS to $2.29-2.41 on +1-2% comps, primarily due to anticipated shrimp and salmon inflation.  Management plans to take 2-2.25% pricing next year in order to partially offset the cost of sales increase.  We don’t necessarily view the guide down as a negative.  In fact, we would argue management is being conservative and has put in place reasonable expectations.

 

Overall, we believe our bull case was validated by the recent results.  CAKE has proven it can withstand a difficult competitive and macro environment, while the majority of their peers struggle.  One concern we have is in regard to traffic, which was down -0.9% in 3Q13.  While this is certainly better than the casual dining industry in general, we do believe it is an issue.  Traffic has now fallen for four consecutive quarters and management must reverse this trend.  We are confident they will be able to do so in 2014. 

 

What we liked in 3Q13 results:

  • Both revenues and EPS beat
  • System-wide same-restaurant sales beat expectations
  • Cheesecake Factory same-restaurant sales beat expectations
  • Lapping easy comps in 4Q13
  • Board of Directors declared a quarterly cash dividend of $0.14 per share
  • Repurchased $90.2m worth of shares in 3Q13
  • Plan to repurchase another $65 million worth of shares in 4Q13
  • New unit openings continue to exceed expectations
  • Domestic and international growth plans remain on track
  • Cash flow generation is strong and predictable
  • Management remains committed to returning cash to shareholders

What we didn’t like in 3Q13 results:

  • Traffic was down -0.9% and has been negative for four consecutive quarters
  • Grand Lux Café same-restaurant sales missed expectations
  • Shrimp and salmon inflation could cause problems in FY14
  • FY14 EPS guidance was revised down to $2.29-2.41

CAKE: PROVING ITS METTLE - CAKE company

 

 

 

Howard Penney

Managing Director

 

 


HOT 3Q13 CONF CALL NOTES

Solid Q and typically low ball guidance. Continue to like HOT due to European exposure, better transactions market, and cash returns to shareholders.

 

 

“We delivered solid results in the face of an uncertain global economic environment... In North America, where occupancies remained at all-time highs, REVPAR increased by 6.9% at our Company-Operated hotels... We remain bullish on the long-term trends of rising wealth and increasing demand for travel in fast growing economies, even in the face of slower growth in China, unrest in the Middle East, and economic challenges in Latin America.”

 

- Frits van Paasschen, CEO

 

 

CONF CALL NOTES

  • Trends of increasing global demand for travel is helping them
  • In mature markets there is still low supply
  • Transient corporate and leisure is growing at a healthy rate
  • Gov't demand which is less than 2% of their business was negatively impacted in the quarter
  • Europe is also showing very low supply as demand is building. Excluding London, owned and leased hotel RevPAR was up 3%. 
  • Chinese SPG nights outside of China were up 20%. Occupancy in China was up over, but they did get hit on rate in China.
  • In Latin America - Mexico strength was not enough to offset Brazil weakness. Argentina improved.
  • Given that they have completed most of the renovations to their owned portfolio this positions them more attractively for potential buyers. 
  • In the past, they have sold hotels with minimal tax leakage and are working to continue that for future sales
  • SVO: $1BN of CF since 2009. Concentrating on markets where they can replenish inventory and maintain good profit market.  A larger portion of their business is generated outside of unit sales. Fees & resort operations account for about 30% of SVO EBITDA. 
  • Mgmt & franchise fees:  70% of their pipeline is UUP and Luxury. 70% are being built outside the US
  • Over the past few years they pulled over 60 UUP/Luxury hotels from their brand portfolio
  • HOT brands accounted for 1 in 5 new UUP/Luxury openings worldwide
  • Sales through their web channels have doubled over the last few years. Their global sales team sells 2x as much as a few years ago. Delivering over 50% of their occupancy.
  • Intend to return cash to shareholders
  • Net benefit from around $5MM from termination fees offset by some one-time expenses in SG&A
  • Bal Harbour Condos are 97% sold
  • North America- very steady RevPAR growth of 4-6% despite a weak macro environment given the lack of new supply.  Robust transient revenues have been growing by 8-9% followed by leisure and corporate travel.
    • Expect these trends to extend into 2014
    • Group pace remains in the mid-single digits and expect rate increases in the high to mid-single digits
    • Expect RevPAR to be in the 5-7% range for 2014
  • Europe:  Absent of new supply has allowed occupancies to reach record levels and keep RevPAR steady in the 2-3% range. Expect that to continue.  They have a good summer in Spain and strenght in E. Europe. Hope that demand situation will improve in 2014 which would increase their pricing power.
  • China: disappointing this year and in Q3. Saw a small increase in demand but not as good as expected. In the East and South growth has been better as the economies are less government dependant. 
    • 122 operating hotels and should end the year at 140
    • No change in pace of new openings and signing
    • Assume that RevPAR growth will be in the 2% range in 4Q
  • Asia: 9.3% RevPAR growth but they were hard hit by FX.  Expected continued strength in 4Q at the upper end of their 5-7% range.
  • Middle East/Africa:  Egypt declined 33% in 3Q. Nigeria was also impacted. The gulf continues to grow in the high single digits.  Trends are likely to continue in the 4Q.
  • Latin America: US travel to Mexico is back but Brazil travel is slowing - their business is impacted by renovations.
  • Finishing at the high end of their guidance range despite unfavorable FX movements that hurt them by $14MM and asset sale impact of $8MM
  • Expect to complete sell out of Bal Harbour this year
  • Have LOI's signed on additional hotels on top of the 2 they expect to close next Q
  • Have lowered their capital spend program for the year again - as a result of decisions to delay projects and asset sales
  • They will not be doing a securitization deal this year but will resume next year
  • They will be reducing their capex spend on owned hotel next year

Q&A

  • Are putting more effort and seeing more interest in their assets than 6 months ago. They are motivated sellers perhaps than 6 months ago.
  • $12MM of EBITDA impact in 2014 includes the 2 that should close soon
  • Most of the international buyers are looking for trophy assets - 1 to 2 at a time.  In the US, it's mostly REIT buyers
  • They do have some larger hotels on the market than a year ago.
  • Appetite for exploring a spin-off of their assets to accelerate getting to asset light.  They continue to look at different options - but in the past this option has not been as attractive.
  • It's a bit premature to say that they are behind their goal of selling an additional $3BN of assets. Tax planning is part of it.
  • 90% of their incentive fees comes from outside the US and do not have preferred returns, hence their incentive fees are more stable. 2/3 of hotels are paying incentive fees WW and 80% of hotels outside the US are paying incentive fees.
  • Why not a higher dividend? 
    • want to be able to consistently grow it
    • can always do a special
    • want it to be safe and sustainable through out the cycle
  • Leverage target?  Just want to be investment grade.
  • Impact of government shutdown - have seen some cancellations in DC/ San Diego. Have some lead time to fill the cancellations from other business. Whatever the impact turns out to be, it will be transitory.
  • Net impact of pushing back the securitization this year is $100MM of cash
  • Their growth in China now is really in Tier 2 & 3 markets, so they are geographically shifting to the middle of the country.  West and central China is where the government is directing most of the development. Mix of business in those markets is more national.
  • Sheraton: UUP segment in NA is a challenging place to be. Their base of hotels is older than many of their peers.
  • In 2014, the hope is that Europe will begin to improve and that they begin to lap the weaknesses in ME, Latin America and China
  • Other Management Revenues: had higher termination fees - (sounds like the net benefit was $5MM net of the SG&A charges) - so that implies about $10MM of termination fees
  • Interest in selling assets is not solely in NA 

 

HIGHLIGHTS FROM THE RELEASE

  • Starwood’s Board of Directors has declared the Company’s annual cash dividend of $1.35 per share. The Board of Directors has also decided to pay dividends to stockholders on a quarterly basis commencing in 2014.
  • In the third quarter of 2013, the Company repurchased approximately 2.73 million shares at a total cost of approximately $180.7 million and a weighted average price of $66.14 per share. As of September 30, 2013, approximately $443.3 million remained available under the Company’s share repurchase authorization. Subsequent to the end of the quarter and through October 18, 2013, the Company repurchased an additional 1.14 million shares at a total cost of approximately $75.9 million and a weighted average price of $66.69 per share.
  • During the quarter, the Company signed 36 hotel management and franchise contracts, representing approximately 7,800 rooms, and opened 15 hotels and resorts with approximately 3,700 rooms.
  • At September 30, 2013, the Company had approximately 400 hotels in the active pipeline representing approximately 100,000 rooms.
  • During the third quarter of 2013, 15 new hotels and resorts (representing approximately 3,700 rooms) entered the system and eight properties (representing approximately 1,400 rooms) were removed.
  • Special items in the third quarter of 2013, which totaled a benefit of $20 million (after tax), primarily related to a favorable adjustment to a legal reserve, tax benefits associated with a non-core asset sale and the reversal of a valuation allowance on deferred tax assets which are now deemed realizable.
  • Excluding special items, the effective income tax rate in the third quarter of 2013 was 31.3%
  • Total vacation ownership revenues increased 11.3% to $157 million in the third quarter of 2013, when compared to 2012, primarily due to increased revenues from resort operations, which included the transfer of the Westin St. John’s revenues from owned hotels to vacation ownership. Originated contract sales of vacation ownership intervals and number of contracts signed increased 1.2% and 2.3%, respectively. The average price per vacation ownership unit sold decreased 1.9% to approximately $14,000, driven by inventory mix.
  • The Company realized residential revenues from Bal Harbour of $40 million and generated EBITDA of $19 million, compared to revenues of $62 million and EBITDA of $12 million in the same period of 2012. During the third quarter of 2013, the Company closed sales of 12 units at Bal Harbour and realized incremental cash proceeds of $40 million associated with these units. From project inception through September 30, 2013, the Company has closed contracts on approximately 97% of the total residential units available at Bal Harbour and realized residential revenue of $1.1 billion and EBITDA of $268 million.
  • The increase was primarily due to the timing of expenses in 2013 when compared to 2012 and certain non-recurring expenses including an elective payment to maintain a management contract. The Company continues to expect selling, general, administrative, and other expenses to increase 2% to 3% for the full year
  • The Company recorded a favorable adjustment to a legal reserve of approximately $22 million in the three months ended September 30, 2013, related to judgment and settlement, interest costs, legal fees and expenses in regards to a long standing litigation. This adjustment was treated as a special item in the third quarter results.
  • Gross capital spending during the quarter included approximately $33 million of maintenance capital and $70 million of development capital
  • During the third quarter of 2013, the Company completed the sale of a non-core asset for cash proceeds of approximately $12 million and recorded a gain of approximately $4 million. The Company has also entered into an agreement to sell two hotels that is expected to close in the fourth quarter

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS

Takeaway: In this note we remind investors just how differently the labor market will "look" by Feb/Mar 2014 and again explain why.

California Exits the Data (Mostly) and Now the Data Looks Pretty Good

Last week we focused on the impact that distortions from California were having on the perceptions of the labor market. This week we'll revisit that theme. Take a look at the first two charts below. The first chart shows the Y/Y change in NSA initial claims by week since the start of August.  The red line shows the average amount of Y/Y change for the month of August, a reasonable baseline trend ahead of the distortion. We then see the impact of the California and govt shutdown on the data, first suppressing it and then inflating it. Based on this morning's data, it appears that the NSA series is back to baseline. The Y/Y change in NSA claims this morning was a decline of 34,412 vs the same week last year. That compares with the August 2013 average of a decline of 34,508 Y/Y. The media is reporting that California is still not caught up, but either that's not true, or the underlying data is stronger today than what we were seeing in August, when claims were improving at a rate of 10-11% Y/Y. The second chart shows California in isolation. The key here is that state level data is only available on a 1-week lag. Consequently, we're looking at last week's numbers since they're the most current available. You can see that as of last week, California reported 83,383 initial claims, which was up about 11k Y/Y from 2012. The trend had been that 2013 claims were coming in at a rate of roughly 21k lower Y/Y, so we would expect to see a roughly 33k sequential improvement this week and that's almost exactly what we saw (again, see the first chart below).

 

The bottom line is this. The seasonally-adjusted NFP numbers reported Tuesday reflect the low watermark in the labor market. This is no surprise, as August/September have represented the low watermark for the past 5 years due to the distortive effects of Lehman Brothers on the seasonal adjustment models. Just as we've seen in the past 4 years, we would expect the "perceived" labor market data to steadily strengthen over the coming 5-6 months through the Feb/Mar 2014 timeframe and carry with it a steadily rising market but also a steadily rising expectation for tapering sometime in the late first quarter or second quarter of 2014. Plan accordingly.

 

Revisiting the Ghost of Lehman

For a look at multiple charts illustrating the serious seasonality distortion in NFP caused by Lehman's economic ripples refer to our macro team's note from Tuesday, entitled: "September Employment: Marking the Low?" We've included one chart from that note below (the third chart down). It shows that in each of the past 4 years, the average positive trendline improvement from September through February has been 118k monthly jobs (i.e. you're 118k higher in Feb than you were in Sep). Conversely, the average negative trendline change from March through August has been -56k monthly jobs (i.e. you're 56k lower in August than you were in March). Translation, the market thinks we're at a 140k monthly NFP run rate right now, but by March, the market will think we're at 250-260k. That will create a very different environment for Fed expectations.

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 17

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 18

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 20

 

Nuts & Bolts 

Prior to revision, initial jobless claims fell 8k to 350k from 358k WoW, as the prior week's number was revised down by 0k to 358k.

 

The headline (unrevised) number shows claims were lower by 8k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 10.5k WoW to 347.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.9% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.2%

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 1

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 2

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 3

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 4

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 5

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 6

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 7

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 8

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 9

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 10

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 11

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 12

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 13

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 19

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 14

 

Yield Spreads

The 2-10 spread fell -15 basis points WoW to 219 bps. 4Q13TD, the 2-10 spread is averaging 229 bps, which is lower by 5 bps relative to 3Q13.

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 15

 

INITIAL CLAIMS TELL A VERY DIFFERENT STORY THAN NON-FARM PAYROLLS - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

UA: The Biggest Quarter That Never Mattered.

Takeaway: UA may face a tough margin stretch ahead. Great company, but we can find other stocks with better growth at a lower price.

UA might have a couple tough margin qtrs ahead of it.  The good news is that its finally making progress outside the US.

 

UA is a great company that is coming into its own, but it may face a couple of tough margin quarters ahead. UA is one of the most expensive names in consumer, and we can find other stocks with higher quality growth at a lower price.

 

Given how hated UA's stock is (see our sentiment monitor in Exhibit 1) we suspected that material revenue beat followed by a better print on the EPS line would be enough to give this stock a shot in the arm.

 

UA: The Biggest Quarter That Never Mattered. - UAsentinmentmonitor

 

But then we flipped over to the balance sheet and a 59% boost in inventories (despite only a 25.7% boost in sales), and juxtaposed that against the -33bp erosion in Gross Margins in the quarter. Any way we slice the onion, bloated inventories and weakening gross margins hardly inspires confidence in any financial model.  In fact it is almost always a precursor to additional gross margin weakness.

 

WHEN A BRANDS LINE SWINGS DOWN AND FLIRTS WITH THE LOWER RIGHT QUADRANT, IT'S NEVER GOOD

UA: The Biggest Quarter That Never Mattered. - UAsigma

Also, footwear sales were up 28% in the quarter. Don't get us wrong -- that's a great number for most brands. This isn't most brands -- it's UnderArmour. A few years ago when the footwear product used to -- well…stink -- we'd expect sub par growth. But the brand has finally figured out its identity and has put out product that consumers actually want to wear -- -both men and women. But does this add up to 28% growth? We'd think something greater -- perhaps even 2x (at least if it wants to maintain a 48x forward multiple.)

 

UA: The Biggest Quarter That Never Mattered. - UAPE

Let's put that multiple into perspective for a minute… UA is expensive -- period. But some of the best stocks in the market are expensive (and some of the worst stocks are cheap). We're not a fan of PE/Growth multiples. But when looked at alongside other high growth peers it certainly puts things into perspective we can get a good sense as to relative value.  SO let's do that…lets compare UA against a who's who of high-flying consumer growth names. We're talking everything from TSLA, CMG, AMZN, UA, NFLX, KORS, NKE, WWW, RL, FNP, FNP and RH.  Unfortunately for UA, it tips the scale along with TSLA, AMZN and NFLIX at 2.0x PEG.  As an aside, our favorite name is RH -- the cheapest name on the page.

 

 

There were definitely some things we liked this quarter, and those focused on the areas where UA has been damaged goods in the past -- The biggest of those is International where It just opened up a huge Brands experience store in Shanghai, which is a great idea no matter how you slice it.  For the first time in…well, ever…it looks like UA can get 10% of its sales outside of these United States. That would be a big valuation kicker for US, because there's a fair sized contingent that thinks UA is forever rooted in the US. We disagree, by the way. Secondly, womens continues to outpace the company's overall growth rate, and now accounts for about 30% of total revenues. To put that into perspective, Nike announced last week that it's targeting its women's business to account for 24% of revenues by 2018. UA, already has a well established women's product, and if womens were to account for nearly half of the business in the years to come as company management indicated that could be a serious growth opportunity.


Q&A: CLIENTS ASK, WE ANSWER

Takeaway: In the note below, we respond to a collection of our most thoughtful client inquiries regarding asset allocation of late.

This note was originally published October 23, 2013 at 16:06 in Macro

Q&A: CLIENTS ASK, WE ANSWER - q2

QUESTIONS:


  1. It feels like what has been working on an intermediate-term TREND basis is now starting to break down and/or underperform, while the things that haven’t been working on that duration are starting to break out and/or outperform. Is this something you guys are seeing as well? How do we take advantage of this shift?
  2. What does “Down Dollar, Down Rates” mean to the US economy? Aren’t lower interest rates good for the consumer?
  3. If the dollar and rates break down, would that make you bullish on emerging markets?
  4. So what do I do with all of this as it relates to my gross and net exposures?

 

It’s no secret that US monetary and fiscal policy is generating a fair amount of consternation, confusion and contempt among global financial market participants.

 

As one of the few non-buyside teams that possess a consistent and repeatable process for interpreting and risk-managing the never-ending stream of market signals and economic data, we have been humbled by a large number of thoughtful questions over the past couple of days. As such, we thought we’d pull together a quick synopsis of said client interactions with the intent of supplementing your respective internal debates.

 

Q: It feels like what has been working on an intermediate-term TREND basis is now starting to break down and/or underperform, while the things that haven’t been working on that duration are starting to break out and/or outperform. Is this something you guys are seeing as well? How do we take advantage of this shift?

Between the politically compromised FOMC and the highly politicized, dysfunctional mockery of government on Capitol Hill, it’s becoming increasingly clear to us that both market participants and economic agents are interpreting recent policy deltas as supportive of a return to the pre-2013 Global Macro playbook of being addicted to the drug that is QE. At least that’s precisely what the math suggests.

 

The TREND-duration directional relationship between the USD and US equities/US equity market volatility has completely reversed in recent weeks. Additionally, the positive correlation between the USD and US interest rates is picking up steam amid what appears to be the start of a #WeakDollar + #RatesFalling regime. The things that are typically inversely correlated to the USD are becoming dramatically more so as investors respond to the US dollar’s accelerated breakdown.

 

Q&A: CLIENTS ASK, WE ANSWER - dale1

 

The US Dollar’s long-term TAIL line of support is under attack – as is the UST 10Y Yield’s intermediate-term TREND line of support. Is this a head-fake or will these new regimes hold in spite of a positive seasonal tailwind in labor market data from now through MAR? At the bare minimum, preliminary analysis of Janet Yellen’s recent contributions to the FOMC suggests that an #IndefinitelyDovish Fed is NOT a low-probability event. If you have yet to review our SEP 23 note titled, “THINKING LIKE A FED HEAD”, we strongly encourage you to do so; its conclusions are looking increasingly prescient by the minute.

 

Q&A: CLIENTS ASK, WE ANSWER - DXY

 

Q&A: CLIENTS ASK, WE ANSWER - UST 10Y

 

After underperforming all year, higher-yielding equities are starting to outperform. While it’s too early to emphatically proclaim a reversal of the existing trend,  the developing quantitative signals highlighted above might lend some expediency to the development of a new one.

 

Q&A: CLIENTS ASK, WE ANSWER - 7

 

Commodities are the lone holdout from an asset class perspective, with both Gold and the CRB Index continuing to make lower-highs amid a bearish TREND and TAIL setup.

 

Q&A: CLIENTS ASK, WE ANSWER - GOLD

 

Q&A: CLIENTS ASK, WE ANSWER - CRB Index

 

We continue to have a zero percent asset allocation to commodities (and fixed income). Make no mistake, however, we’d be buyers of Bernanke’s commodity and bond bubbles if the quantitative signals support that. Like most consistently effective asset allocators, we have no qualms about going both ways and changing our minds on a particular market when the quantitative and fundamental signals support making the switch.

 

Q&A: CLIENTS ASK, WE ANSWER - 6

 

As the chart above highlights, our dynamic asset allocation model is heavily invested in international equities and foreign currencies. We remain the #EuroBulls as the Germans and Brits looks to increasingly take share from the US in the global capital allocation pie chart. Remember, capital chases yield and currency appreciation – with the latter being another way to state that capital tends to flee from domestic currency debasement by seeking out inflation hedge assets, including other currencies.

 

Q&A: CLIENTS ASK, WE ANSWER - EUR

 

 

Q: What does “Down Dollar, Down Rates” mean to the US economy? Aren’t lower interest rates good for the consumer?

Regarding the first part of the question, the confluence of #WeakDollar and #RatesFalling has historically been associated with economic environments that are characterized by slowing growth and accelerating inflation. Conversely, the polar opposite economic setup (growth accelerating as inflation decelerates) has historically been associated with a #StrongDollar + #RatesRising regime.

 

Q&A: CLIENTS ASK, WE ANSWER - 2

 

In our 4Q13 Macro Themes deck, we purposefully led off with two potential economic scenarios for the US here in the fourth quarter. As of now, it appears increasingly likely that a trip to Quad #3 (growth slowing as inflation accelerates) is in the cards. If our historical back-tests provide any insight, that setup should apply downward pressure upon the domestic equity market and upward pressure upon domestic credit spreads.

 

Q&A: CLIENTS ASK, WE ANSWER - 3

 

Regarding the latter part of the question, Keith had this to say in response to the client’s inquiry:

 

“Lower rates have been capitalized on by anyone w/ half a brain. That’s not to say you don’t get the brainless to refi this next go-round, but the pools of people affected get smaller with each higher-lows in rates, and the real upside to rates rising is in real-incomes rising alongside the savings rate.”

 

Q: If the dollar and rates break down, would that make you bullish on emerging markets?

Absolutely. We were wise to suspend our street-leading bearish thesis on emerging markets by covering our EEM short on SEP 9; we followed that up with an extremely detailed report on SEP 19 with how to play emerging markets across countries and asset classes from here – the conclusions of which remain relevant today.

 

To recap our views on emerging markets, the iShares MSCI Emerging Markets ETF declined a cumulative -2.4% from its APR 23 addition to our Best Ideas list – which came in conjunction with our 100+ slide Black Book titled, “EMERGING MARKET CRISES: IDENTIFYING, CONTEXTUALIZING AND NAVIGATING KEY RISKS IN THE NEXT CYCLE” – to our SEP 9 cover. The aforementioned delta is well shy of the +5.9% gain for the S&P 500 over that time frame and was inclusive of a maximum drawdown of -12.8% during the ~2M period from APR 23 to JUN 24. The EEM ETF is up +4.3% since we covered our short on SEP 9 and is now bullish TREND.

 

Q&A: CLIENTS ASK, WE ANSWER - EEM

 

What’s outperforming? To a large degree, the bombed-out markets which became dramatically oversold during the prolonged EM rout which took place earlier this year.

 

Q&A: CLIENTS ASK, WE ANSWER - 4

 

While it would be analytically reckless for us to tell you to go out and speculate in the most risky of markets at the current juncture, we do feel confident in saying that in the absence of a clear uptrend in both the USD and US interest rates, investors should resort to trading emerging markets on idiosyncratic country fundamentals – something we highlighted earlier this week in a deep dive on India’s evolving political landscape.

 

Q: So what do I do with all of this as it relates to my gross and net exposures?

In a word, #GetActive. That means lower your gross exposure, tighten your net exposure and trade the ranges. Don’t make it any more complicated than that amid all of this policy uncertainty – especially if you’ve also had a good year and don’t want to give back any YTD gains.

 

Q&A: CLIENTS ASK, WE ANSWER - 5

 

Many thanks for your time and please keep the questions coming; we are always in the market for thought-provoking discourse.

 

Have a wonderful evening,

 

Darius Dale

Associate – Macro Team


RCL 3Q 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:  

  • BETTER:  Quarter was in-line with our estimate but Q4 guidance was better.  2014 outlook for Europe and Alaska was surprisingly strong.  Guidance for the Caribbean market was less positive and management concedes visibility remains low.  We prefer CCL given its outsized exposure to a European recovery.

RCL 3Q REPORT CARD - rcl  revised

 

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EUROPE

  • BETTER:  Europe is trending well and will see yield improvement in 2014.  Mgmt sees a comeback in Southern Europe (Germany), particularly from the affluent cruisers.
    • PREVIOUSLY:  "Europe is developing about as we anticipated and we are expecting net yield increases in the mid-single digits for the year."

CARIBBEAN

  • WORSE:  2014 net yields are forecasted to be flat to slightly down.  The positive commentary heard in Q2 has shifted to a more cautious tone. 
  • PREVIOUSLY:  "The Caribbean, which represents about a quarter of our deployment in Q3 and almost half in Q4, is holding up pretty well. We are aware there has been a lot of focus in the investment community on the overall health of the Caribbean in light of some of the competitive pressures. And we would be naive to say that this has not affected us to some degree. But at a macro level, consumers seem to be recognizing the value of our brands and our pricing in the region continues to show improvement for the year."

ASIA

  • BETTER:  The continued territorial dispute between China and Japan has prevented RCL from making calls to Japan.  However, Asian bookings are up considerably in 2014.
  • PREVIOUSLY:   
    • "Asia is the only product in our portfolio that we are forecasting to have lower yields for the year."
    • "The territorial island dispute between China and Japan has forced us to drop Japanese ports-of-call from our itineraries, and in total we have had to modify 30 sailings. These modifications have resulted in some churn in our book-of-business as well as some volatility in the booking behaviors in the region."

PULLMANTUR

  • WORSE:  The tone was somber and the outlook dark.  Tough road ahead.
  • PREVIOUSLY:  "Our Pullmantur brand is one exception here (positive growth) and as Richard noticed, the brand will be putting much more emphasis on developing its business in Latin America."

COMPETITIVE PRICING/PROMOTIONAL ACTIVITY

  • SAME:  It seems that the heighted promotional activity is centered mostly around short excursions in the Caribbean.  Pricing in the Caribbean remains very competitive. 
  • PREVIOUSLY:  
    • "In recent weeks competitive pricing has gotten more intense.
    • "Throughout recent months, there has been a lot of promotional activity. We've discussed in the past that you can basically expect to see promotional activity throughout the revenue cycle."

2013/2014 BOOKINGS

  • SAME:  RCL's booked load factors are currently ahead of the same time last year in all four quarters of 2014.  Booked prices for the first quarter are in-line, while up in 2Q, 3Q and 4Q.
  • PREVIOUSLY:  "Bookings for both 2013 and 2014 are ahead of where we were at the same time last year, both in terms of load factor and pricing."

2014 NCC EX FUEL

  • BETTER:  Although mgmt acknowledges it will be an aggressive target, they believe 2014 NCC ex fuel will be better than flat.
  • PREVIOUSLY:  "Our objective for next year is to at least achieve flat net cruise costs excluding fuel. And while we don't forecast what the price of oil will do, we do work aggressively to reduce our energy consumption."

ONBOARD YIELD

  • BETTER:  3Q onboard yields were up 7% YoY.  Strength was seen among US customers in beverages, gaming, retail, shore excursions, specialty dining sectors.  For 2014, mgmt sees package shore excursions as having the most upside opportunity.
  • PREVIOUSLY:  "Onboard spending was much stronger. Onboard revenues increased 8.2% for APCD in the quarter and generated about $0.04 per share of favorability to our April's expectations.  Overall, we are generally seeing better spending behaviors out of the North American guests, but we are also enjoying very favorable results from our revitalization project. Gaming, beverage, specialty restaurants and shore excursions all out-performed."

ALASKA

  • BETTER:  mgmt is seeing modest yield growth in this region
  • PREVIOUSLY:  "I think we anticipated that Alaska had a terrific beginning of the year and it was unlikely to continue at that trajectory."

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