The Economic Data calendar for the week of the 25th of November through the 29th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.
Carnival Cruise Lines (CCL) has been in rough seas the last couple of years. It started with the Concordia incident in January 2012 and more recently impacted by ship operational problems (e.g. power failures, fires, etc). While our team has been cautious on Carnival since the Triumph fire (Feb 2013), we think, after three guide downs in yields and earnings, performance and sentiment may have bottomed.
We are encouraged by the changes made by the new management team with new CEO Arnold Donald at the helm. Given the deterioration of the Carnival brand and a breakdown in communication between customers and the agent community, it was a timely change. In addition, the collaboration between Holland America and Princess may help eliminate operational redundancies and reduce in-house competition.
Our proprietary cruise pricing survey indicated that starting in October 2013, Carnival brand pricing in the Caribbean had stabilized; pricing further improved in November 2013. Furthermore, European business seems to be on the upswing. These are encouraging signs before the 2014 Wave Season.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
Wave Season begins in mid-late January, where the bulk of 2014 bookings will be made. While CCL has already warned of a tough operating environment for the 1H 2014, 2H 2014 yields are estimated to be modestly positive, due to easy comps.
LONG-TERM (TAIL) (the next 3 years or less)
2014 is another transition year for CCL as investors look ahead to 2015 for normalization purposes. In 2014, the ship operator will be busy with the many major ship revitalizations it will need to conduct to improve the quality and sustainability of its fleet. The rebuilding of the Carnival brand will be a slow one but we believe the management has put in place aggressive marketing/advertising programs and incentives to right that brand over time.
Takeaway: This week’s FIXED outflows (-$7.5B) and inflows into EQUITIES (+$7.2B)is the widest weekly spread between debt/equity of the year.
This note was originally published November 21, 2013 at 07:34 in Financials. To learn how to subscribe to Hedgeye research click here.
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Total equity mutual fund flow for the week ending November 13th was a strong $7.2 billion, the eighth best week in all of 2013 and the fourth consecutive week over the $7 billion weekly inflow mark. Domestic equity mutual fund flow was $3.9 billion, an slight deceleration from the week prior with world equity funds collecting $3.2 billion in new investor capital. Total equity mutual fund trends in 2013 however now tally a $3.1 billion weekly average inflow, a complete reversal from 2012's $3.0 billion weekly outflow
Fixed income mutual funds continued persistent outflows during the most recent 5 day period with another $7.5 billion withdrawn from bond funds, the worst week in over 2 months. This week's draw down worsened sequentially from the $4.2 billion outflow the week prior which has now forced the 2013 weekly average for all fixed income funds to an $1.0 billion outflow which compares to the strong weekly inflow of $5.8 billion throughout 2012
ETFs experienced mixed trends in the most recent 5 day period, with equity products seeing slight outflows and fixed income ETFs seeing slight inflows week-to-week. Passive equity products lost $338 million for the 5 day period ending November 13th, a sequential improvement from the $4.9 billion outflow the week prior, with bond ETFs experiencing a $274 million inflow, also an improvement from the $74 million subscription in the 5 day prior. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results
In the Hedgeye Asset Management Thought of the Week below, we outline that the current 2013 running redemption within fixed income mutual funds is actually still below the prior bond outflow cycles of 1994, 1999, and 2003 which means that even more substantial fixed income outflows would not be abnormal.
For the week ending November 13th, the Investment Company Institute reported the 8th best week in 2013 for equity inflows with over $7.2 billion flowing into total equity mutual funds. The breakout between domestic and world stock funds separated to a $3.9 billion inflow into domestic stock funds and a $3.2 billion inflow into international or world stock funds. Both results for the most recent 5 day period within stock funds were above the 2013 weekly averages, with the domestic stock fund 2013 weekly mean at just a $628 million inflow and world stock funds having averaged a $2.5 billion weekly inflow during 2013. The aggregate inflow for all stock funds this year now sits at a $3.1 billion inflow, an average which has been getting progressively bigger each week and a complete reversal from the $3.0 billion outflow averaged per week in 2012.
On the fixed income side, bond funds continued their weak trends for the 5 day period ended November 13th with outflows staying persistent within the asset class. The aggregate of taxable and tax-free bond funds booked a $7.5 billion outflow, a sequential deterioration from the $4.3 billion lost in the 5 day period prior and the worst redemption in 11 weeks. Both categories of fixed income contributed to outflows with taxable bonds having redemptions of $6.4 billion, which joined the $1.1 billion outflow in tax-free or municipal bonds. Taxable bonds have now had outflows in 19 of the past 24 weeks and municipal bonds having had 24 consecutive weeks of outflow. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $1.0 billion weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.
Hybrid mutual funds, products which combine both equity and fixed income allocations, continue to be the most stable category within the ICI survey with another $1.4 billion inflow in the most recent 5 day period. Hybrid funds have had inflow in 20 of the past 22 weeks with the 2013 weekly average inflow now at $1.6 billion, a strong advance versus the 2012 weekly average inflow of $911 million.
Exchange traded funds had mixed trends within the same 5 day period ending November 13th with equity ETFs posting a slight $338 million outflow, a sequential improvement from the larger $4.9 billion redemption the week prior. The 2013 weekly average for stock ETFs is now a $3.1 billion weekly inflow, nearly a 50% improvement from last year's $2.2 billion weekly average inflow.
Bond ETFs managed a slight inflow for the 5 day period ending November 13th with a $274 million subscription, a sequential improvement from the week prior which netted a $74 million inflow for passive bond products. Taking in consideration this most recent data, 2013 averages for bond ETFs are flagging with just a $274 million average weekly inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow for 2012.
Hedgeye Asset Management Thought of the Week - The 2013 Drawdown is Still Below Average:
While the fixed income mutual fund asset class is firmly in outflow with taxable mutual funds having had outflows in 19 of the past 24 weeks and tax-free or municipal bonds having had redemptions in 24 consecutive weeks, we none-the-less highlight that this sequence of outflows is still running below average on a percentage of beginning bond fund assets historically. The drawdowns of 2003-2004, 1999-2000, and the notorious bond redemption of 1994-1995 all resulted in bigger losses on beginning bond fund outstandings. Respectively, the '03-'04 redemption resulted in 5.0% of beginning bond fund assets being lost, a similar percentage to the 1999-2000 bond outflow cycle which drew down over 5.0% of beginning fixed income assets. These losses however were a far cry from the 14.0% of beginning bond fund assets which were redeemed in 1994 when the Federal Reserve surprisingly raised rates at the time. The 2013 redemption sequence, which started in May, has now resulted in nearly $150 billion having been pulled out of bond funds however on a percentage basis, this redemption is just a 3.9% loss on beginning bond fund assets. Thus solely on historical precedent, another $40 billion in bond outflows on the current $3.8 trillion bond fund outstandings would match the losses in '03/'04 and in 1999/2000, however another $380 billion could flow out of the bond category to match the 1994 redemption sequence. In our roll-out of the asset management sector in August, we fore-casted over a $1 trillion shift out of fixed income over a multi-year time period to give investor's a broader perspective.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
This note was originally published November 22, 2013 at 07:55 in Daily Trading Ranges for Hedgeye subscribers. If you would like to learn more and subscribe click here.
The trillion dollar question: When does the Fed taper? Probably not one week before Christmas (the FOMC meets DEC 17-18). In fact, we are increasingly of the view that the Fed is aware of the systemic risk present in the bond market and is potentially setting up to never commence tapering. They will likely accomplish this by setting far-too-aggressive targets for GDP growth and shifting their focus to combating a perceived risk of deflation, at the margins.
We continue to think the great rotation out of debt and back into stocks is: A) still on; and B) will provide a structural bid to the equity market. That said, we now think that bid could be from lower prices as proxy hedging activity from distressed fixed income investors (not to be confused with investors that invest in distressed debt) weighs on broader asset prices in the interim. Our immediate-term Risk Range for SPX is 1785 - 1805.
|FIXED INCOME||6%||INTL CURRENCIES||24%|
Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged. If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.
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.
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.
"Last night would have been a hell of a night to assassinate a President." -John F. Kennedy, two hours before his assassination
Massive inflows into Equities this week... (+$7.2 billion versus -$7.5 billion outflows in Bond funds) This is the widest weekly spread between debt/equity of the year.
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