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JAPAN STRATEGY UPDATE: ALL ABOARD!

Takeaway: We were wrong in calling for investors to tactically take profits Abenomics Trade on 11/27. Carry [trade] on…

On NOV 27, we published a note titled, “THREE COMPELLING REASONS WHY YOU SHOULD TAKE PROFITS IN THE ABENOMICS TRADE NOW” in which we called for a 3-6M correction in the Abenomics Trade (i.e. short JPY/long Japanese equities); while we don’t want to get caught up in overreacting to today’s FOMC decision to commence tapering, that is no longer a view we have any conviction in.

 

In the note specifically, we analyzed three catalysts in support of that now defunct thesis:

 

  1. The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6M monetary and fiscal policy vacuum in Japan.
  2. Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels.
  3. Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such aggressive swings in the net length of the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.

 

Clearly, catalyst #1 – which was easily the most important of the three – has now been voided. As such, we are no longer as concerned as we were about the lopsided nature of consensus positioning – which has actually gotten worse (i.e. even more net short) since that note was published.

 

In the spirit of keeping score (timing is the most important factor in any investment thesis we present to subscribers), the USD/JPY cross has appreciated a solid +2.1% since then, while the Nikkei 225 Index has appreciated +0.9% since then (not inclusive of what is likely to be a huge melt-up overnight).

 

Thankfully we weren’t brash enough ignore the existing quantitative signals by making a call to buy the yen or short the Nikkei. Wrong is wrong, however. Now it’s time to move on and trade the market that we’re being presented with today.  

 

As such, while you’re likely to see a near-term correction in the USD/JPY cross as event-driven funds take profits, we now expect what we’ve been expecting since early in the fourth quarter of 2012: the USD/JPY cross is on its way to 125 (and counting) over the intermediate-to-long term.

 

Giddy-up – Kuroda’s just getting started (in recent statements, he’s actually been setting the table to incrementally ease monetary policy by mid-Spring of 2014). Meanwhile, it appears (for now at least) that the central planning law firm of Bernanke, Yellen, Dudley and Bullard LLP is running out of gas. That’s very bearish for the JPY in the context of the intermediate-to-longer-term monetary policy outlook in Japan.

 

Enjoy the rest of your evenings,

 

DD

 

Darius Dale

Associate: Macro Team

 

JAPAN STRATEGY UPDATE: ALL ABOARD! - USDJPY


Fed Tapers, Pigs Fly

Takeaway: Buy-the-Damn-Bubble #BTDB anyone?

Nope. I did not see this taper coming. Caught me by total surprise.  

 

It was the right move by the Fed (just happened to be 3 months too late). It’s funny, I’ve never been more wrong on a macro event, and more right being long the market (we had 8 LONGS on in Real-Time Alerts, 1 SHORT) at the same time.

 

It’s called being right for the wrong reasons.

 

Fed Tapers, Pigs Fly - ben

 

Joy.

 

The Fed is one big Gong Show. No two ways about it. None of this central planning stuff makes any sense. Accept that and trade your way out of whatever you need to.

 

As Andrew Huszar (He’s the former Fed MBS guy I interviewed the other day on HedgeyeTV and author of WSJ op-ed “Confessions of a Quantitative Easer”) tweeted, “The December taper is clearly a legacy move for Bernanke. Don't read more near term moves into it. Yellen was QE3's biggest advocate.”

 

Being flexible when the macro game changes is more critical than ever. Since I'm not as smart as most pundits, I need to (and do) change my mind faster than the consensus herd.

 

On a related note, can you say all-time high? As we’re fond of saying here at Hedgeye, all-time is a long time. 1811 on the S&P 500? Buy-the-Damn-Bubble #BTDB anyone? .

 

There are great short selling opportunities now in bonds (or stocks that are like bonds - hint: MLPs…check out our Hedgeye Energy Ace Kevin Kaiser for some insight on that mess). Fed tapering is bad for bonds -we will cut the asset allocation to that Bernanke Bubble back to 0%.

 

The volatility in the Fed's decision making as of late should perpetuate more market volatility. The VIX is making another higher-low; don’t get stuffed chasing the highs. No way I buy Gold on this.

 

Bernanke remains focused on The Lagging Economic Indicator (unemployment rate); Basically Bernanke is recapping all the Q313 data that he missed - i.e. he should have tapered in September.

 

Meanwhile, the Fed is increasing its growth forecasts just as Hedgeye is cutting ours; and the Fed is cutting its inflation forecasts just as Hedgeye is raising ours.

 

Bottom line? The entire bubble is going squirrel. An epic end, to an epic year. 


FDX: Express Margin Evidence

Summary

 

FedEx may have missed consensus for the quarter, but from what we can see, it was mostly due to the impact of the late Thanksgiving holiday on FedEx Ground’s margin.  Estimating the impact of the early Thanksgiving holiday was particularly difficult going in, as we had noted (Metrics Changing?).  The slight raise in guidance suggests that management expects holiday volume to merely shift to FY 3Q.  The Express margin showed good headline gains and is the real focus for many investors.  We will wait for the detail and disclosure in the 10-Q (likely tomorrow afternoon) for a fuller analysis.

 

 

A Few Highlights

 

Express Margin:  The Express segment margin showed solid (+1.4 percentage points YoY) improvement, driven presumably by fuel, headcount reductions and lower overhead costs.  FedEx Express also showed a 16 basis point improvement in its ex-fuel Margin YoY, despite the new USPS contract, holiday shift and other potential headwinds.   In our view, it’s the Express segment margin expansion that counts and it reasonably promising in the release. 

 

Intercompany Cost Reallocation:   The reallocation of intercompany expenses remains a driver of the YoY improvement of the Express margin.  Last quarter, overhead declined YoY, which was not the case this quarter.  That raises some questions around cost reshuffling vs. cost reductions, but the effect does not appear large enough to be a game changer.

 

Trade Down Easing?:  This quote from the press release was interesting to us: “Within the IP category, average daily volume for the lower-yielding distribution services declined while IP average daily volume, excluding these distribution services, increased 1%. FedEx International Economy® average daily volume grew 10%.”  The phrase "trade down" was not even in a conference call question, at least that we heard.

 

Guidance Change:  The guidance move was small, but in the right direction.  There was no particular reason to look for a large guidance change in this quarter.  The bump appeared geared toward reassuring investors about the FedEx Ground holiday timing issue.

 


Sticking With What Is Working

 

We have 'liked' FDX shares since our November 2012 Black Book ("When Will Then Be Now? Soon"), presenting FDX (and Deutsche Post) as a top long idea.  Our thesis centered on the potential for the Express division to be made significantly more profitable.  At the time, FedEx Express was 'free' in our valuation, presenting an attractive risk/reward. After a near 60% rally in FDX shares since then, we still think FedEx Express has some additional value to be recognized by the market.  Importantly, we now have some evidence that they are making progress - albeit slow.  We will also wait for better detail in the 10-Q tomorrow, as we were surprised by some of the incremental disclosures last quarter.


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Fragile Markets

This note was originally published December 12, 2013 at 07:45 in Morning Newsletter

“I’d rather be dumb and antifragile than extremely smart and fragile” Nassim Taleb

The big picture

The hyperbole of that quote is that Taleb thinks he’s extremely smart. I’m definitely dumber than he is. So I guess he’d agree that I should never hire him to do what I can do better myself – manage real-time market risk.

 

It’s a great job for a dumb hockey player.

Macro grind

The reason why I thought of Taleb this morning is that I was thinking about volatility. To his credit, he was one of the first to write about risk managing volatility from a market practitioner’s perspective. That doesn’t mean I agree with everything he wrote.

 

In terms of how we measure market entropy in real-time (multi-factor, multi-duration), yesterday was a one of the few critically bearish signal days for the US stock market.

 

To boil that down to 3 basic factors in our model (Price, Volume, and Volatility):

 

1. PRICE – SP500 A) failed to make a higher-high versus the 1808 all-time closing high and B) broke 1785 TRADE support

2. VOLUME – was +13% versus my immediate-term TRADE duration average (1st mini-volume spike on a down price move)

3. VOLATILITY – front-month VIX broke out above @Hedgeye intermediate-term TREND resistance of 14.91

 

This has never happened before (because the SP500 has never been at this all-time closing high before). But historically, countries, currencies, companies (anything with a ticker) do this frequently. And when they do, I respect Mr. Macro Market’s signal.

 

What is a bearish immediate-term signal @Hedgeye?

 

1. PRICE = down

2. VOLUME = up

3. VOLATILITY = up

 

Conversely,

 

1. PRICE = up

2. VOLUME = up

3. VOLATILITY = down

 

… is a bullish immediate-term signal @Hedgeye (especially when it’s happening within a bullish intermediate-term TREND).

 

Sure, I have been buying-the-damn-bubble #BTDB pretty much all year – but while I covered a couple of oversold shorts like CAT yesterday, I didn’t buyem on the long side. An intermediate-term TREND breakout in volatility is the #1 reason for that.

 

Are there tangible risk factors that could perpetuate and intermediate-term TREND move in US Equity Volatility back towards 20 on the VIX? Big time. Here are some behavioral ones that I discussed with clients in NYC yesterday:

 

1. VIX has been making a series of higher-lows since AUG as the Fed started to confuse with Taper-on/Taper-off in SEP

2. The average “net long” positioning of the hedge fund community is testing its all-time high zone of +60% again

3. The II Bull/Bear Spread just blew out to fresh 5 year highs of +4390 basis points to the BULL side

 

That last point is one of the more fascinating migrations I have seen in my career. To put a 44% spread between bulls and bears in context, that II Bull/Bear Spread was only +1710 basis points wide in the 1st week of September 2013.

 

Early September – that’s when people may have claimed to be “bullish” but they certainly weren’t positioned Bullish Enough. All this market needed to scare the hell out of the pretend bulls was a VIX rip to 17 in late August.

 

If the VIX goes to 17-18 tomorrow, people who are buying-the-damn-bubble #BTDB will get killed. So, if you have been in the habit of doing the buy on red, sell on green #GetActive thing, you want to be more careful buying now than you were last week.

 

How about fundamental research factors that could turn bearish in the next 1-3 months?

 

1. US Dollar being devalued and debauched (no-taper) towards its YTD lows

2. US GDP #GrowthSlowing from its cycle high of +3.6%

3. Down Dollar = Up Yen = Down Nikkei (another thing people didn’t enjoy in late AUG)

 

Rather than making up my own academic sounding word like antifragile, I’ll call managing real-time market risk this way what it is – being mentally flexible. If you can Embrace Uncertainty every market day, you might feel less dumb every once in a while too.

  • CASH: 58
  • US EQUITIES: 6
  • INTL EQUITIES: 6
  • COMMODITIES: 0
  • FIXED INCOME: 8
  • INTL CURRENCIES: 22

Our levels

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr yield 2.76-2.91%

SPX 1779-1815

VIX 14.31-15.67

USD 79.67-80.38

Pound 1.62-1.64

Gold 1216-1260

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fragile Markets - Chart of the Day


Putin’s Silver Spoon

Yesterday Russian President Vladimir Putin announced an agreement to loan the Ukraine $15 Billion and reduce the cost of natural gas exports by one-third. Will this quell the weeks of protests against Ukrainian President Viktor Yanukovych’s government?

 

While publically there was no talk of the Ukraine joining Putin’s custom union (for trade) – which already includes Kazakhstan and Belarus and is a contentious issue for the “Western” protesters – make no mistake that with this agreement Russia has reconfirmed its dominance over the Ukraine, and with it won a key geopolitical victory. For the Ukraine, it spells years, if not decades, before real reform (political and economic) may be realized.

 

Our Position: despite heavy foot power (protests) against President Yanukovych over the last four weeks, we do not expect dissent to topple government leadership that is orientated to the East (Russia). This view is built on several factors, including the unwillingness of the EU to fully commit to bringing the Ukraine into the EU, or conversely meet the sway of Putin to fold the Ukraine under its geographic empire. What Russia can provide in funds (both directly and through gas subsidies) we don’t foresee the EU attempting to match, and this balance of payments should reinforce existing strong levels of political corruption (beyond just the President), supported by a sizable proportion of the populous that identifies with the East. Further, unlike during the Orange Revolution, there is no clear organized opposition (merely disparate dissenters), all of which suggests to us that while protests may continue, there’s low probability that Yanukovych’s rule is toppled (especially following the deal with Russia) and a high probability that the Ukraine maintains its alliance with the Kremlin for the foreseeable future.

 

Below we note historical background, critical developments, and analysis aided by sources in the region to contextualize the protests:

  • Protests Beyond Just A Trade Agreement. While Yanukovych’s decision last month (21 NOV) to reject a trade deal with the EU (that had been in the works for a number of years) sparked the largest protest since the Orange Revolution in 2004, the dissent is rooted in opposition to years of crony capitalism, centered around a small group of oligarchs and government heads profiting from the state at the hands of the population.
  • The Orange Revolution Failed. The 2004 Orange Revolution ushered in great hope for the ideals of the West: democracy and reform in the spirit of the EU institution, but the Revolution failed.  Yulia Tymoshenko, with her camera-friendly crown of blond locks, and Viktor Yushchenko, with his discolored and uneven face after being poisoned by the opposition in 2004, were strong faces and voices of the Orange Revolution. The protests led to the defeat of Yanukovych in a forced second run-off election that ushered in Yushchenko as President and Tymoshenko as his Prime Minister in early 2005. While their leadership brought great “hope” that the country could have its Berlin Wall or Solidarity moment, their stars faded quickly (along with hope of real reform) under the weight of a corrupt state.  
  • Tables Turned. By 2010, Yanukovych won back the Presidency. By this time, Tymoshenko was surrounded by controversy and suspicion over gas contracts that she arranged with Russia in 2009: allegedly she agreed to inflated gas prices (which hurt the nation and led to shutdowns) in return for political favors and personal profit. Even Yushchenko testified against her in 2011 and Yanukovych sentenced her to a 7 year term in 2011 – a position the EU decries as “unjust” without substantiating with refuting evidence. Yanukovych’s rule since his reelection has been marked by the further consolidation of power and wealth, going so far as to take out certain leading businessmen (and oligarchs), redistributing assets and leadership positions to an inner circle of family members and a close cadre of “extended” family.
  • Economic Plight. The economy has unraveled under Yanukovych. GDP has gone from its last high of +5% at the end of 2011 to -1.3% as of Q3 2013. Pressing is an underfunded government (deficit around -8.5% of GDP) with plunging foreign reserves.  The country is estimated to have $17 Billion of debt payments due in the next two years, hence the importance of a bridge loan from Russia/EU. The government’s mismanagement of the economy has also included a lack of infrastructure spending and investment, equating to the erosion of living standards, while chasing away foreign investment on fears of sovereign default.   
  • No Opposition Leadership over Divided Kiev. Recent demonstrations illustrate that unlike the Orange Revolution, there’s no united leadership in the opposition parties. The contenders are made up of: Arseny Yatseniuk (leads the party formerly headed by Tymoshenko), Vitaly Klitschko (a boxing champion that heads the Udar “punch” party), and Oleh Tyagnibok (a right-wing nationalist).  All of them claim to have not seen the protests coming.
  • Ukraine and Kiev Remain Divided. A country with a population of 46 million, the western half of the country aligns itself politically with the West (Europe) and has the highest concentration of native Ukrainian speakers, whereas the eastern half aligns itself with the East (Russia) and primarily speaks Russian as a first language.  Kiev, the capital and largest city, is located centrally to the north, and is itself a very divided city both politically and linguistically. The recent demonstrations suggest that protesters have numbered anywhere between 100K to 600K, but the city remains divided. Reports suggest the protests have a grass roots organization “feel” that lack strong polarizing leadership and have been mostly met by non violence from the government/police, with no recorded deaths.  While the protests have been taking place, as recently as December 3rd, Yanukovych’s government survived a no-confidence vote.
  • Russian Interests. Russia is looking out for its national security interests first and foremost and using its stranglehold on natural gas as a bargaining chip. If Ukraine is under the influence of the EU, Russia is vulnerable to the south. Ukraine also represents an important natural gas transit country for flows to Europe, and a Ukraine under Russian influence helps to solidify Putin’s desires for a trading union. Given that Putin has done nothing to diversify his own economy in the last 12 years, he’s left with few options to exert his political clout beyond straight arming former Soviet satellite countries into his sphere of influence.
  • EU Interests. For the EU, the Ukraine is of less importance from a security perspective, unless it is looking to invade Russia (unlikely). Like Turkey, the Ukraine is geographically at the fringe of Europe. Given the experiences of the Eurozone ‘crisis’ and tail of slow growth alongside political indecision (there are now 28 separate parliaments and 18 Eurozone countries), we do not envisage the EU yearning to add a historically highly corrupt government to its roster.  
  • Russia Terms. To plug the country’s balance of payments deficit (for an estimated 18-24 months) Ukraine will issue $15 billion of Eurobonds which Russia will purchase from its National Wellbeing Fund containing $88.1 billion – the first tranche of $3 billion is expected as soon as year-end. In addition, the discount given to the Ukraine on natural gas, from current prices of around $400 per thousand cubic meters (tcm) to $268.50 tcm, is worth another $3 billion in subsidy. While Yanukovych did not sign off on entering Putin’s custom union (which Kazakhstan and Belarus have joined and which reeks of attempts to get the old Soviet gang back together), expect that this deal didn’t come without terms. Besides the national security piece that Russia receives, our guess is Putin will run the Ukraine’s PR campaign – he will decide if and when the Ukraine should enter his custom’s union.

Conclusion - Tipping East. The Ukraine remains a state uncomfortable with addressing its own sovereignty, preferring to be aligned. In our analysis, the Kremlin remains Yanukovych’s preferable partner over the EU given 1) Putin’s ability to quickly write a check (to cover the government’s liabilities), 2) his reelection aspirations for 2015 and ability to “win” cheaper, uninterrupted heat for the nation, 3) the cultural affinity to the East, including a significant percentage of the population that identifies with Russian rule and to some extent nostalgically yearns for a return to the Soviet days, 4) the likely harsher terms the EU and international organization could offer in exchange for loan packages, and 5) the lukewarm reception of the EU to fold the Ukraine into the EU.

 

If we look to the market for its risk assessment, as expected following yesterday’s deal Ukrainian CDS and sovereign credit yields dropped in a hurry. What’s interesting, however, comes from the second chart below that shows Ukraine’s 5YR Sovereign CDS pulled back on a historical basis (to its maximum based on Bloomberg data). Here it’s clear that while risk was being priced up into the event (1st chart), the absolute level is a moon shot from all-time highs in March 2009, a period when Western European nations had to negotiate with Russia over gas shut-down to their countries that was being pumped through the Ukraine. What this signals to us is that the EU community will only get its hands dirty in the interests of Ukraine when it stands to clearly and personally receive benefit. The “failures” of these protests for change and the muted response from the EU suggest to us that the Ukraine is far from what could be tipping point levels. Russia will remain its puppet master.

 

Putin’s Silver Spoon - 1. ukraine

 

Putin’s Silver Spoon - 2. ukraine

 

Matthew Hedrick

Associate


CCL F4Q YOUTUBE

In preparation for CCL FQ4 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.

 

 

EX CARNIVAL BRAND 

  • Fleetwide booking volumes during the last 12 weeks from the end of June, covering sailings over the next three quarters, are at the same levels – about the same levels as last year. These bookings have been at higher prices versus last year.
    • For North American brands, booking volumes during this 12-week period are higher year-over-year at lower prices.
    • For EAA brands, booking volumes are lower at nicely higher prices.

CARNIVAL BRAND 

  • Booking volumes and pricing over the last 12 weeks are both lower year-over-year in the low single-digits and mid-double-digits range respectively.
  • Carnival's booking volumes have also shown recent improvement, and during the last six weeks are running higher year-over-year. As Carnival booking volumes steadily increase, we are expecting their cruise pricing to gradually improve over the longer-term.
  • Carnival Cruise Lines' brand continues to demonstrate its resilience in the market, maintaining high occupancies albeit at lower prices. The perception and consideration surveys on the Carnival brand continued to show improving trends at a faster pace than originally projected, so we are greatly encouraged by these positive signs.
  • Although, Carnival Cruise Lines' pricing is lower than we would like, with the new national advertising campaign and the increase in marketing spend this fall and winter, we do expect to see a recovery of pricing as we cycle into the second half of 2014. Recently, Carnival adopted a strategy of holding firm on pricing, even if its ships sail at slightly lower occupancies. We believe this will make Carnival's pricing recovery more achievable as we move through 2014.

4Q 2013 TRENDS

  • On a fleetwide basis, and this excludes Carnival, cumulative occupancies are lower at the same pricing levels as last year. 
    • For North American brands, excluding Carnival again, occupancies are slightly lower at slightly lower prices.
    • Carnival Cruise Lines occupancies for the fourth quarter are lower at lower prices.
    • For EAA brands, occupancies are lower year-over-year at slightly higher prices, reflecting the positive patterns we have experienced during the last 12 weeks. Costa brand occupancies and pricing for the fourth quarter are nicely higher.
  • North American brand revenue yields in the fourth quarter, excluding Carnival, are expected to be down slightly.
  • Carnival Cruise Lines yields in the fourth quarter are expected to be lower, in the double-digits range. And fourth quarter EAA pricing, revenue yields are expected to be higher year-over-year.

1H 2014 TRENDS

  • Although, pricing on bookings taken to-date for the first half of 2014 is higher, because we are running behind on occupancies, we are expecting revenue yields will follow the usual pattern of coming down as we close out the first and second quarters.
  • As a result on a fleetwide basis, for the first half of the year, we are estimating a low single-digits decrease in revenue yields, in a similar range to the lower yield we experienced in the third and fourth quarters of 2013; this expectation includes the Carnival Cruise Lines yields.
  • North American brand yields in the first half of 2014 are expected to be lower year-over-year and EAA brand yields are expected to be higher. 

2H 2014 YIELD

  • We are ramping up marketing efforts in both North America and Europe this fall and winter and are expecting that revenue yields will turn positive in the second half of the year.

1Q 2014 TRENDS

  •  On a fleet-wide basis, pricing on bookings taken to-date is higher year-over-year with lower occupancies. For North American brands, excluding Carnival, pricing is higher on lower occupancies. Carnival Cruise Lines pricing is lower on lower occupancies. For EAA brands, pricing on bookings taken to-date is flat year-over-year at lower occupancies.

2Q 2014 TRENDS

  • Second quarter of 2014 bookings taken to-date, which is still in the early stages of development, on a fleetwide basis, excluding Carnival, pricing is slightly higher year-over-year at lower occupancies.
  • North American brands, pricing is slightly higher at lower occupancies. At this stage, Carnival's pricing is also higher at lower occupancies. 
  • For EAA brands, pricing is slightly higher at lower occupancies.
  • Big increase in Caribbean supply

COSTA

  • We expect the company's performance will continue to strengthen over the remainder of this year and throughout 2014. Brand perception surveys for Costa continue to show improvement, particularly in Italy and France; its two most important markets.
  • We are forecasting continued revenue yield increases in 2014 for Costa, despite what is still a very challenging European economic environment, especially in Italy.

NA BRANDS

  • Our two premium brands, Holland America and Princess, are all expected to have a solid performance in 2014. Our Seabourn brand, although small, is performing extremely well.

COST SAVINGS

  • And then as we look at it and look at our total spend and the opportunity to leverage across the brands, I think there will be opportunities, additional opportunities, for cost savings.

% BOOKED

  • The ranges that we generally talk about are – for the next quarter, which would be the fourth quarter, would be 85% to 95% booked. The second quarter out, which is the first quarter, 50% to 70%. And then the second quarter, which is three quarters out, 30% to 50% booked. And we have indicated recently that we're at the lower end of those ranges as far as booking patterns are concerned.

 


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