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The Policy Urge

This note was originally published at 8am on November 11, 2013 for Hedgeye subscribers.

“They had no heads. The frenzy was all they had… the urge, and the urge was all they felt.”

-Tom Wolfe (Back To Blood)


In between my son Jack’s hockey practice and his 6th birthday bender, I’d like to say that it surprised me this weekend when I glanced at the cover of The Economist’s headline: “The Perils of Falling Inflation.” But, sadly, it did not. PhD Keynesian Economists are officially the world economy’s greatest threat.


The urge for policy makers to do something has reached a tipping point. Un-elected and un-checked, Janet Yellen’s Federal Reserve is likely to embrace this unprecedented Policy To Inflate that the Europeans (ex-UK) have just reiterated via an ECB rate cut. Incrementally easing monetary policy into an economic acceleration of +2.84% US GDP, that is.


The Economist’s sub-title makes the media as complicit as Nero (The Emperor “who fiddled while Rome Burned” -Wikipedia): “In both America and Europe central bankers should be pushing prices upwards.” I couldn’t make this up if I tried. After Deflating The Inflation (from the 2011-2012 all-time global inflation highs), these people want the all-time highs in food and Oil prices again!


Back to the Global Macro Grind


Deflating The Inflation is not DEFLATION. That’s one of the many buzz words regressive economists use to fear-monger you into believing you should allow them to A) devalue your hard earned currency and B) earn 0% on your savings, forever.


In the 1980s/1990s, we had < $20 Oil. I might call that “deflation”, but Brent Oil at $105? And if the 2 best post WWII US Growth periods (1983-89 and 1993-1999) were reflexive #StrongDollar “deflation” periods, what’s the problem with deflation again?


A study we highlighted in our Q313 Macro Themes deck by Atkeson and Kehoe spanning a period of 180 years (17 countries)  found 0% relationship between deflation and depressions. There were actually more depressions during periods of inflation than deflation. That won’t shock anyone who lives in the real world.


In other news, look at what happened in macro markets last week:

  1. Dollar Up (+0.6% US Dollar Index)
  2. Rates Up (+13bps to 2.75% on the UST 10yr)



That’s what I want. That’s not what my Federal Reserve loving Keynesian types (Zervos and Hatzius) want. Neither do guys and gals who are in the business of being levered long Gold, Bonds, or anything Equities that looks like a bond.


Again, with a stronger Dollar + #RatesRising, look at what else you got last week:

  1. Gold down another -1.9% to -23.6% YTD #crashing
  2. REITs and MLPs -4.1% and -1.9, respectively, lagging the Financials (XLF) +1.2%, big time
  3. Emerging Markets (MSCI EM) -1.7% and MSCI LATAM Index -2.8% (to -12.9% YTD)

No, this is not what all of #YieldChasing investor styles want. They want what Bernanke and Yellen taught the Japanese and Europeans to want – a “risk-free” rate of 0% that punishes savers and forces Mom & Pop to buy into the slow-growth Gold Bond Bubble thing under the cowardly veil of a “deflation” threat.


In markets, eventually tends to happen quickly. Eventually, the mother of all “deflations” will be in the price of overvalued, over-stimulated, and over-owned debt that policy makers are urging investors to buy into. To a large extent, that’s been our call for the better part of 2013 – that a stronger US Dollar + #RatesRising would prick the Bernanke Gold Bond Bubbles.


So how is Janet Yellen going to reflate Gold, Bonds, MBS, REITS, etc. if:


A)     Economic gravity doesn’t cooperate with her (more GDP of 2.84% and US monthly employment report beats?)

B)      Fund Flows continue to front-run her?


Solving for A) is already in motion. She’ll do what every central planners going back to Nero did and change the rules. She’ll make up a new unemployment target of 5.5-6% and she’ll cry wolf about “deflation” when it’s Deflating The Inflation that gave the USA growth surprises on the upside to begin with!


As for B), Bernanke and Yellen have been highly ineffective in convincing the buy-side that this ends well. Looking at last week’s ICI Fund Flow data, the flows continue out of Fixed Income and into Equities:

  1. Equities: after a record weekly inflow in the wk prior, US equity fund flows were up another +$7.9B w/w
  2. Fixed Income: another -$4.1B in outflow last wk following -$2.3B in the wk prior

All the while, the US IPO market is partying like 1999 with 192 IPOs ($51.8B) for 2013 YTD!


The urge to surge! It’s all about the urge to inflate asset prices, baby! These people have no heads. This is a bubble frenzy. To bubble up, or not bubble up (every prior asset bubble the Fed has perpetuated), remains Mr. Market’s question.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.64-2.77%

SPX 1748-1778

VIX 12.52-14.19

USD 80.35-81.51

Pound 1.59-1.61

Gold 1271-1318


My heartfelt thank you goes out to all the service men, women, and veterans around the world who have watched over us while we sleep,




Keith R. McCullough
Chief Executive Officer


The Policy Urge - Chart of the Day


The Policy Urge - Virtual Portfolio


Takeaway: Current Investing Ideas: BNNY, CCL, FDX, FXB, GHL, HCA, MD, NKE, RH, SBUX, TROW and WWW

Here are the latest comments from our Sector Heads on their high-conviction stock ideas.


***Please note that we added two new stocks -- Carnival Cruise Lines (CCL) and Greenhill & Co (GHL) -- to Investing Ideas this week. In addition, we removed Boyd Gaming (BYD) from our high-conviction Investment Ideas.


BNNY Annie’s stock was down 5% on the week, underperforming the consumer staples group.  Consumer Staples analyst Matt Hedrick says there was no new news out on the stock beyond last week’s announcement of a 2.5MM common stock secondary.  Hedrick says this dilution will not compromise the overall per-share profit outlook for the company.  His long-term bullish thesis on BNNY remains intact, based on the company’s advantaged organic portfolio, strong retail positioning for growth, and easier top line and gross margin comparisons going into the back half of its fiscal year.


CCL – Please see the full report sent out Friday by Hedgeye's Gaming, Lodging & Leisure team.


FXB – European Macro analyst Matt Hedrick expects currency wars to persist, further devaluing the USD and EUR to persist, with the British Pound the relative winner across both currency cross trades.  Both Mario Draghi at the ECB and Ben Bernanke/Janet Yellen at the Fed continue to signal a dovish policy stance.  In contrast, BOE policy discussion continues to set a hawkish tone: Hedrick expects interest rates to be on hold over the medium term, with expectation for a hike over the longer term, and the asset purchase program target (QE) to remain unchanged. 


Both positions should strengthen the GBP/USD and GBP/EUR.  Says Hedrick, “we continue to see improving data out of the UK, including GDP revisions estimating 2014 growth of 2.8%. Further tailwinds include CPI that is slowly deflating (at 2.2%), which should be a benefit to consumer consumption, and the unemployment rate is slowly declining (at 7.6%).”  He is looking for the GBP/USD to head to the $1.65 - $1.70 range over the intermediate term. 


FDX – We learned from recent filings that several noteworthy investors, including Soros, Paulson and Dan Loeb’s Third Point, have recently entered positions in FedEx.  These investors may see the same opportunity to create value in the Express division that Industrial sector head Jay Van Sciver has been presenting to investors for a year.  While the presence of such investors always spurs enthusiasm – notably activists such as Loeb, who has already held talks with FDX CEO Smith about succession – it can take time for events to unfold.  Van Sciver says in the immediate term, attention is likely to shift toward earnings in mid-December. 


GHL – Please see the full report sent out Thursday by Hedgeye's Financials Sector team.


HCA– Healthcare.gov continues to limp along, although from our daily check of Alexa.com, traffic continues to fall, which we believe means progress in processing applicants.  But this week we also heard another piece of even more frightening information, that healthcare.gov will likely be unable to process payments for medical care as of January 1.  That's a big deal. Because so far, given the commitments made by all of the intertwining stakeholders in the US medical Economy, the only way to go from here is forward, even if things are not running smoothly.  There simply is no way to reverse course now. But if payments can't be processed, and cash can't circulate, that sounds like a mortal threat. 


We still see a lot we like even before ACA, but we will get very concerned if this story gathers momentum. If the threat of repeal moves from the realm of rhetoric to the realm of possibility, it would be a very negative sentiment overhang, at least in the short term.  But that is a big if right now and appears unlikely. (Please see "Sector Spotlight" below for additional insight.)


MD – US Census released preliminary birth numbers through June 2013 this week.  As we expected, volume was down year over year, not by a lot, but some. While the overall trend continues to improve, we would have expected to see a consistently positive trend by now. 


As it is, the deferral pool now stand at between 10% and 20% of the annual birth rate of 3.8M , and that is just counting women who have yet to have their first child.  We are 6 years since the first down year, the median age of the deferral class is now 32. If even a small percentage of women who have held off having a baby the last six years start to return to the maternity ward it will be a huge tailwind for MD earnings and the share price. (Please see "Sector Spotlight" below for additional insight.)


NKE – In this week’s investing ideas we thought we’d show, rather then tell. Every week we comb through athletic apparel and footwear point-of-sale (POS) data. That’s right, in this instance POS stands for point-of-sale. These numbers are not perfect by any means. They fail to appropriately address a brand’s direct to consumer business, and since the term ‘athletic’ is pretty vague in its description it is hard to judge what categories/products are and are not included in the data. While the data may not be perfect in its entirety it is consistently inconsistent, and it gives us a birds-eye view of the US athletic apparel marketplace allowing us monitor industry, brand, and category trends.


We whipped up a chart that breaks out the market share for three of the brands in NKE’s portfolio: Nike, Brand Jordan, and Hurley. The market share numbers reflect year-to date totals starting from the first week of February 2013 and they are compared to numbers from the similar 2012 time period. To give you some context, total athletic apparel sales for the year-to-date are over $6.9 billion and have grown 8.7% year-over-year. The key callout here is obviously Nike brand. It has captured an extra 4.2% of the market share this year and now accounts for over 25% of the total market. Sales of Nike have grown 30% over last years totals, and there has been no deterioration in price. What does that tell us? Well, people buy Nike, lots of Nike and not because it’s on sale. 



RH – Williams Sonoma reported third quarter earnings numbers on Wednesday. Total company comps at WSM were up 8.2% led by their Pottery Barn (+8.4%) and West Elm (+22.2%) divisions. All in all we are encouraged by the print as it relates to RH, and we’ll walk you through some of the important read-throughs.


1) WSM’s prices are under pressure. Gross margins were down as a result of what they called ‘competitive pricing strategies.’ We interpret that clever choice of words to mean that someone (read RH) out there is offering a better product at a more attractive price. RH has a unique sourcing model that allows it directly source product, which eliminates the middleman markup. WSM is trying to realign its sourcing infrastructure, but they are well behind RH on this front.


2) RH’s closest compares are Pottery Barn and West Elm. Those businesses performed well, especially West Elm ,which like RH, is growing its store count. This isn’t a situation where WSM wins and RH loses. Home furnishings is a $164 billion dollar industry. Neither company currently holds a significant share of that marketplace, and both can continue to steal share from local and regional competitors.


3) WSM called out the strength of its Baby division within Pottery Barn Kids. This concept is gaining traction with consumers and strengthens our belief that once RH Baby gains a retail presence in the new Design Gallery concept, it can be a significant revenue driver.


4) Williams Sonoma put up a +1.4% comp number. This concept has comped negative in 5 of the last 8 quarters. RH Kitchen has the opportunity to be what Williams Sonoma is not. Limited SKU’s, less reliance on food and seasonal items. Shoppers aren’t responding to Williams Sonoma and we believe RH can fill that void.


5) WSM is opening its first store in London in 4Q. We don't foresee international expansion in RH's near future, but based on WSM's success entering the market we could see international as a real possibility for RH.


SBUX Starbucks’ management presented at Morgan Stanley’s Global Consumer & Retail Conference earlier this week.  One big takeaway is that transactions per labor hour at Starbucks is set to end FY13 at 11.7.  This is an improvement from FY12 and significantly higher than it was five years ago.  Not only is Starbucks getting bigger, but it is getting more efficient as well.  Restaurants sector head Howard Penney says “We cannot overstate the importance of speed of service in today’s restaurant industry, particularly as it applies to quick-service and fast casual companies.” 


Speed of service is a key part of the quick-serve experience.  Indeed, it’s called “quick serve” for a reason, and the faster consumers can get in and out of a store, the more likely they are to return.  SBUX is acutely aware of this and has consistently capitalized on efficient in-store execution.  On another front, Penney notes some investors are concerned that the rollout of La Boulange will inevitably slow the speed of service in SBUX stores.  “We have not seen any signs of this.” he says, and reminds investors that SBUX has been leading the technological revolution in the quick-service category.  Penney believes their superior innovation will allow them to continue to deliver a speedy customer experience.


TROW During our recommendation of T Rowe Price as a core long position, we have solely been using industry information on equity flows from the Investment Company Institute (ICI), the trade group for the asset management industry.  However, there is a private survey of asset management performance and flows called Simfund which we don’t use that projected a very positive outlook for TROW separately from our research process using ICI data.


Last week, this private Simfund survey calculated that in October alone that T Rowe has netted over $1.8 billion in new net inflows, more than the prior 3 months combined which totaled just $1.2 billion. Thus it is safe to say that the fourth quarter has started in very strong fashion for this leading equity manager. In addition, Simfund projected that TROW’s industry leading performance gap has widened favorably, meaning TROW’s mutual fund families have increased their lead as the best performing mutual funds of the public asset managers. According to Simfund, now 70% of TROW’s assets are 4 or 5 star Morningstar rated, the only mutual fund products that have historically generated any significant inflow (see annual 4 and 5 star inflow versus 1 to 3 star rated products below).


In a nutshell, TROW stock is a prime beneficiary of the positively trending U.S. stock market with industry leading performance and improving retail equity mutual fund flows.



WWW–  Let’s be clear. We don’t like Wolverine Worldwide because of its strong position in the athletic apparel marketplace. It simply can’t compete with the likes of Nike and Under Armour. However, there is one very important thing that WWW does better than the rest of them and that is sell product in international markets.


Merrell and Saucony are on a tear in 2013. You can see this in the chart below which compares year-to-date (February – now) sales with the similar period in 2012. Clearly the brands are doing something right. 




Macro Theme of the Week – The Bubble Bubble

There’s been lots of talk lately about “bubbles” in the marketplace.  Everywhere we turn folks are warning us “Don’t put your money there – it’s a bubble!”  Bubbles here, bubbles there… bubbles bubbling everywhere.  We are witnessing a bubble in bubbles. 


The Fed still doesn’t seem to be able to bring itself to taper, even with strong growth in GDP, and with a marked downward trend in unemployment.  The markets signaled their readiness last month, looking to continue massive outflows from fixed income – which stood to be matched by inflows into equities.  The markets were, in fact, so very ready for the Taper, that the Fed switcheroo hit like a sucker punch.  What were they thinking?


One noted Wall Street pundit with a jaundiced view of the Fed may be onto something.  Fund manager William Fleckenstein says “Wall Street has sort of fooled itself with the Fed all year."  There will be no taper, says Fleckenstein.  Instead, “the Fed is going to make it much more difficult to leave QE. What that really implies, though, is that everything they've been doing thus far hasn't worked.”


We expect Chairman Bernanke would reply, “Whaddaya mean ‘it hasn’t worked’?  Look how strong the recovery is!”  We honestly could not say whether this is dumb luck on the part of the Chairman – being in the right place at the right time – or, as his apologists say, imagine how bad it would have been without QE.  What we do believe is that Bernanke is a creature of his own rather imposing intellect.  Having been placed in a position to run the mother of all market experiments, he appears determined to defeat Keynes’ most famous dictum: “The market can stay irrational longer than you can stay solvent.” 


No one is more eternally solvent than He Who Owns The Printing Press.  With his hand, God-like, eternally cranking out dollars, Bernanke is the Irresistible Force that will finally overpower the Immovable Object of the financial markets.  This will be, in a Marxian-Hegelian-Fukuyamian “end of history” scenario, the End Of Keynesianism As We Know It – when government policy will finally triumph over the marketplace.


People whom we consider smart believe Yellen is more of a pragmatist than her about-to-be-former boss.  Unlike True Believer Bernanke, they think Yellen can be convinced by facts to change her opinion (another famous Keynes quote: “When the facts change, I change my mind. What do you do, sir?”)  This actually creates a quandary: if you think Bernanke’s policy has been horribly misguided and destructive, then you can’t wait for Yellen to take over and be convinced by reality to change course.  If, on the other hand, you fearfully suspect that Bernanke’s course may have been the horribly best we could have hoped for in a miserable situation, then undoing QE could make matters worse than worse.


What do the markets say?


Hedgeye Financials sector head Josh Steiner observed “the US Dollar keeps dropping on Fed comments, but the 10-year Treasury yield keeps going up,” just one of the bubble-icious divergences as the Fed continues the monetary equivalent of Sherman’s March to the Sea.  Despite Yellen’s clear message of more bond buying, tweeted Steiner, the long end of the Treasury yield curve was “hanging in like a champ,” indicating weakened bond prices. 


By historical measures Treasury yields should be signaling a period of champagne and dancing in the streets.  The traditional bank “free money” trade, the spread between the 10-year bond and the 2-year, has widened substantially.  And the yield gap between the 20-year Treasury and the three-month T-bill has blown out to the upside.  This steepening of the yield curve has historically been an indicator of coming economic expansion.  Meaning that we appear to still be firmly strapped into our front-row seat on the #GrowthAccelerating Express.


B. T. D. B.


Our CEO, Keith McCullough, takes Bernanke to task once again this week (see “It’s A Certified Circus”) as the Fed chairman told the Economists Club of Washington that having the Fed stay the course is “the surest path to recovery.”  As the Fed has moved the goalposts on its plan to taper, we are seeing lots of cash piling up.  Lots and lots of it.  A bubble in cash, in fact.  Where will it all go when it bursts?


We are meeting with institutions who are increasingly uncomfortable with the idea of being invested in any particular asset class: bonds could break down if the Fed finally tapers and rates pop; equities have had a huge run and could easily top out if there is even a moment’s uncertainty; commodities still need someone like China to come to the rescue – and Goldman Sachs is calling for a double-digit drop in the price of gold, iron ore, and soybeans all of which could hurt worse than dropping a 14K ingot on your toe, if you are invested in the wrong ETFs.


Says McCullough: Yep, there are bubbles out there.  Lots and lots of them.  And as long as the pile of cash on the sidelines continues to grow, the bubbles will float higher and higher.


There was last year’s fear-mongering bubble that popped while everyone was calling the top in a “US stock market bubble.”  Looks like our 2Q13 #GrowthAccelerating Macro call continues on target.  Says McCullough: Buy the darned bubble!   


There’s a bubble in stocks folks love to hate, as the most heavily shorted stocks in the S&P 500 have risen by over 31% year to date, outperforming the broad S&P 500 itself by nearly 6%.  Buy the darned bubble!


#GrowthAccelerating.  US stocks have soared to all time highs as we watched the country go from 0.14% GDP with the SP500 at 1360 in Q412, to 2.84% GDP Q313.  We’ve had a great ride, says McCullough.  For #GetActive traders, McCullough suggests raising cash on up days, and redeploying it at the next dip.  If GDP growth “slows” to only 2% or a bit above, the equities run could flag.  Much of the push in stocks is being driven by a massive rotation out of fixed income and into equity mutual funds, which we have been writing about.  Fund flows chase performance, and as the equities market pauses to catch its breath we would expect a dip in equity fund inflows.  We think it will not be sustained enough or big enough to damage the long-term bullish trajectory, but it will likely be playable for active traders and bubble buyers.


Says McCullough, “the Fed will cheer on the #GrowthSlowing data as more reason not to taper… and, in doing so, they’ll suck in every last lemming who hasn’t been long US stocks in 2013 to buy the bubble.”  But, says McCullough, the “pop” is a long way off.  Indeed, if the Fed has its way, that day may never arrive.


Meanwhile the cash bubble continues to inflate as more and more fund managers sit on their hands, waiting for clarity.  With clarity will come investment decisiveness.  With decisiveness will come cash inflows.  With inflows will come market tops. 


Until then, the key to trading the bubble is not buying at the absolute bottom, nor getting out at the absolute top.  No one can do that – not reliably and not repeatably.  The key is managing risk within the range.  McCullough reminds us that “tops are processes, not points.”  Once we see the process unfolding, we will manage the risk accordingly.  Until then, says McCullough, B.T.D.B!


Sector Spotlight – Healthcare: Births of a Nation

Healthcare sector head Tom Tobin continues his proprietary survey of US birth rates.  While these figures have obvious implications for companies in his sector – notably, Tobin’s two current names on the Investing Ideas list: HCA and MD – they also contribute to the general economic picture.  Tobin’s earlier work on this series has identified correlations with women’s employment and new family unit formation, and implications for home sales and for sales in the things that go into homes, such as home furnishings, major appliances and pets.


This week Tobin picked up on newly-released data from the US Census Bureau that match the latest results from his proprietary OB/GYN survey “signaling that maternity trends remain flat to down over the last 5 months.”  Census Bureau birth statistics, now available through June of this year, seem to support Tobin’s macro view, and to confirm his latest survey results.


Tobin notes that birth rates are a significant driver for stocks in the Healthcare sector.  In the US, says Tobin, “births make up 25% of all inpatient hospital admissions, 30% of all commercially insured hospital admissions, and 40% of all Medicaid hospital admissions.”  Survey results last year led Tobin to expect a recovery in maternity trends but he says the latest trend appears to be flat to negative, at least through this month.  The CDC calculates this slackening of the pace of births indicates a decline of between 410,000-759,000 births by first-time mothers in their survey called “Deferred and cancelled births for first-time mothers.”  All right, not a poetic turn of phrase.  But a significant statistic.  This slowdown in birth rates also creates a potential reservoir that can have explosive upside impact, should these women come back into the maternity pool.


Regarding Tobin’s Investing Ideas picks, MD remains highly levered to maternity trends.  While there are other drivers such as Parity and M&A, the marginal update has been less positive, where some deals are slipping into 2014 and parity payment changes are slow to evolve.  The overlay of NICU patient days and US birth remains tight with a 0.70 correlation.


Tobin says HCA is also still highly levered to maternity, although pricing, surgical volume acceleration, and organic bed growth remain tailwinds for this company.


There are a few other data points in the report that invite speculation.  One is that medical practices with patients with incomes over $50K report weak deliveries similar to lower income practices, those with incomes under $50K.  While some observers read this as meaning income is not a factor, it could be that there is a mid-range, where families are not earning enough to make it compelling for a woman to keep her job rather than stay home to give birth, but not earning so little that they can’t contemplate the cost of having a baby at all. 


Meanwhile, practices with a higher percentage of Medicaid patients report positive trends relative to practices with higher percentages of patients with commercial insurance.  Again, while there is no clear conclusion to be drawn, this trend could reflect women opting to remain in full time employment, where they retain medical benefits paid for, at least in part, by their employers.


All this is only speculation – but then, that’s what makes the stock market go up and down.  Tobin continues to expect maternity trends to recover over time, “based on the size of the deferral pool, trends in age specific confidence, household formation, and employment.”

Investing Term – Healthcare Sector

Healthcare represents a significant portion of most developed nations’ economies.  This business sector is made up of companies that offer a range of services to maintain health, prevent and cure disease, rehabilitate, sustain, and ultimately provide final comfort for individuals.  Broadly defined, Healthcare contains everything from biotech and pharmaceutical companies that do basic research and create and market drugs, to medical devices and diagnostics, to hospitals and the machines and people who fill them, to the health plans – yes, including the Affordable Care Act – that get folks into the hospitals and HMOs, where the practitioners use the machines, devices, drugs and a broad range of other treatments produced by companies in the group to take care of what ails you.


It is estimated that the Health Care segment on average consumes over ten per cent of developed economies’ GDP, and while the sector has traditionally been seen as defensive – people need health services no matter what the broad economy is doing – significant trends can emerge that affect sector performance.  Some of these appear to be related to broad demographic and economic changes – as exemplified by Tobin’s proprietary work on US birth rates and the implications for economic growth.  And some are clearly discretionary, even if they balloon into major revenue drivers.  Think Botox, for example, or earlier waves of cosmetic surgery such as breast implants.


This year, the broad Healthcare sector has done well, generally keeping pace with the S&P 500, while some subgroups within the sector have outperformed.  According to at least one report, over three-quarters of Healthcare companies reporting in the current earnings season have beaten consensus earnings projections, putting the group slightly ahead of the broad S&P index.  As of the end of October, Healthcare ETFs had risen over 30% YTD – not really beating the S&P overall, but with performance like that who’s complaining?  Meanwhile, BlackRock reports that their own IBB Nasdaq Biotechnology ETF had risen over 52% by the end of 3Q13. 


Gold in them thar ills…?


- By Moshe Silver

Moshe is a Hedgeye Managing Director and author of the Hedgeye e-book Fixing A Broken Wall Street



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.


THE WEEK AHEAD - weekahead

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Stock Report: Carnival Cruise Lines (CCL)

Stock Report: Carnival Cruise Lines (CCL) - HE II CCL table 11 22 13


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.



Stock Report: Carnival Cruise Lines (CCL) - HE II CCL chart 11 22 13

Holy Flows!

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.

Holy Flows! - fl1

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.

Holy Flows! - cast1

Holy Flows! - ICI chart 2



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.



Holy Flows! - ICI chart 3

Holy Flows! - ICI chart 4

Holy Flows! - ICI chart 5

Holy Flows! - ICI chart 6

Holy Flows! - ICI chart 7



Passive Products:



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.



Holy Flows! - ICI chart 8

Holy Flows! - ICI chart 9



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.


Holy Flows! - ICI chart 10



Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA




Notable trends:

  • Coffee prices ticked up +3.6% over the past week, but are down -35.6% on a year-over-year basis as global supply continues to outpace demand.  Low coffee prices will remain a strong tailwind for SBUX, DNKN, GMCR, KKD, THI and other coffee retailers in 4Q13 and throughout 2014.
  • Dairy costs have been volatile, but a favorable comparison in 4Q could support the outlook for CAKE, TXRH and others with exposure to dairy costs, if prices stay at or near current levels.
  • Corn and wheat prices continue to provide retailers, restaurants and consumers with lower food costs than a year ago.
  • Beef prices have been trending up YTD and should continue to pressure margins for BLMNTXRH, CMG, WEN and others with significant exposure.
  • Gasoline prices ticked up 40 bps over the past week, but are down -6% on a year-over-year basis and have provided consumers with some relief.  We will continue to monitor this trend, as any sustained increase or decrease in gas prices could have a significant impact on the direction of discretionary spending.




Notable correlations:

  • Strong correlation to the USD over the past 30 days:
    • Milk +0.93
  • Strong negative correlation to the USD over the past 30 days:
    • Wheat -0.93
    • Gasoline Prices -0.92
    • Chicken Wings -0.89
    • Sugar -0.88
    • CRB Foodstuff Index -0.82
    • Coffee -0.76




















Howard Penney

Managing Director



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