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ARGENTINE DEFAULT 2.0?

Takeaway: Argentina's options have not changed: default or burn the peso. Neither outcome is good for sentiment surrounding beleaguered EM assets.

CONCLUSIONS:

 

  1. What does Cristina Fernandez need to do to stem the tide of currency depreciation, commensurate inflation and capital flight? That’s “easy”: default on its foreign debt obligations and commit to servicing the citizens of Argentina vs. the assets of foreign creditors. A change in monetary regime (i.e. re-pegging the ARS to the USD) wouldn’t hurt either.
  2. Since we know that all of that occurring in the near term is unlikely, it is likely that Fernandez & Co. will continue to burn the peso in order to inflate FX reserve balances. That outcome continues to be priced into the forwards market; consensus has this one right – at least directionally.
  3. What investors might be missing is the eccentric Cristina Fernandez waking up one day, realizing that there is no end in sight, and deciding to pursue the default option.
  4. It’s definitely a risk worth considering heading into 2015; the country’s USD debt service obligations (principal + interest) jump to $9.5B that year (from $3.3B in 2014). After a brief respite in 2016, the maturity wall stiffens again with $11B-plus due in both 2017 and 2018.
  5. At any rate, neither outcome (default or material devaluation of the peso) is good for sentiment surrounding beleaguered EM assets.

 

I feel bad writing so negatively about Argentina’s managerial woes. Typically when our firm publishes bearish research on companies, usually the worst thing that could happen is a bunch of overpaid corporate executives lose their jobs as a result of persistently poor operational performance. For countries, however, the ramifications of persistent mismanagement are considerably more far-reaching.

 

In recent years, Argentina has been a standard bearer in this regard:

 

  • Since President Cristina Fernandez office back in DEC ‘07, the Argentine peso (ARS) has been devalued by roughly -60%; today’s -11% decline to ~8 pesos per USD represents the largest single-day drop since the country abandoned its peg to the USD back in 2002.
  • Reported inflation (+10.6% YoY in 2013) has consistently trailed actual inflation in Argentina, where private sector economists are now prosecuted for publishing estimates (+28.4% YoY in 2013) that conflict with official readings.
  • In the face of rampant inflation and punitive capital controls (including additional measures introduced today, which limit consumers to two online purchases from overseas providers per year), Argentine citizens have been increasingly dealing with blackouts and looting – eerily reminiscent of conditions on the ground post the country’s 2001 default on $95B of foreign currency debt.
  • For those Argentines brave enough risk jail time by circumventing official capital controls, they are now paying a record 12.15 pesos per USD for blue-chip currency swaps in the black market (i.e. ~50% more expensive than the official spot rate), which took off once Fernandez began restricting access to foreign currencies after her re-election in 2011.

 

ARGENTINE DEFAULT 2.0? - ARS

 

ARGENTINE DEFAULT 2.0? - CPI

 

ARGENTINE DEFAULT 2.0? - BCS

 

So why is Cristina Fernandez, who recently replaced her economy minister, cabinet chief and central bank governor back on NOV 18th (her first day back in office after surgery to remove a blot clot near her brain) – after stating emphatically back in MAY that Argentina wouldn’t devalue the peso – burning her country’s currency?

 

As we were keen to highlight in our previous work on Argentina, the Argentine sovereign’s primary issue lies in its ~$50B outstanding of restructured and un-restructured foreign currency debt and the primary source of funds it taps to service that debt – i.e. central bank FX reserves, which have declined by -44% since peaking in JAN ‘11.

 

Specifically, our long-held and accurate bearish bias on the commodity complex has slowed Argentina’s accumulation of FX reserves via the current account (commodities account for ~65% of Argentine exports) – which is now persistently in [slight] deficit territory after having averaged a healthy +3.5% current account surplus during the 2002-10 run-up in global commodity prices.

 

ARGENTINE DEFAULT 2.0? - FX Reserves

 

ARGENTINE DEFAULT 2.0? - CAB

 

It’s too bad for Argentina that commodity prices peaked and started to decline in 2011 – just as our #DeflatingTheInflationII 1Q12 Macro Theme (and subsequent macro themes throughout 2012-13) called for them to do. Either you have a process for internalizing and capitalizing on globally interconnected risks or you don’t.

 

We did. Argentine policymakers didn’t. That’s probably why the peso has declined/been devalued by a cumulative -44% since we started pounding the table on the short side of the ARS (in the NDF market, of course) back in APR ’12.

 

So what does Cristina Fernandez need to do to stem the tide of currency depreciation, commensurate inflation and capital flight? That’s “easy”: default on its foreign debt obligations and commit to servicing the citizens of Argentina vs. the assets of foreign creditors. A change in monetary regime (i.e. re-pegging the ARS to the USD) wouldn’t hurt either.

 

Since we know that all of that occurring in the near term is unlikely, it is likely that Fernandez & Co. will continue to burn the peso in order to inflate FX reserve balances. That outcome continues to be priced into the forwards market; consensus has this one right – at least directionally.

 

ARGENTINE DEFAULT 2.0? - NDF

 

What investors might be missing is the eccentric Cristina Fernandez waking up one day, realizing that there is no end in sight, and deciding to pursue the default option. It’s definitely a risk worth considering heading into 2015; the country’s USD debt service obligations (principal + interest) jump to $9.5B that year (from $3.3B in 2014). After a brief respite in 2016, the maturity wall stiffens again with $11B-plus due in both 2017 and 2018.

 

ARGENTINE DEFAULT 2.0? - DDIS

Source: Bloomberg LP

 

At any rate, neither outcome (default or material devaluation of the peso) is good for sentiment surrounding beleaguered EM assets.

 

Oh well, there’s always the OCT 2015 Argentine general election to look forward to…

 

DD

 

Darius Dale

Associate: Macro Team


Not #BTDB Today: SP500 Levels, Refreshed

Takeaway: I’m not buying-the-damn-bubble #BTDB today. Maybe tomorrow. Maybe not.

POSITION: 9 LONGS, 9 SHORTS @Hedgeye

 

The 3 main issues for the US stock market in our model are as follows:

 

  1. US consumption #GrowthSlowing (rate of change vs Q313’s sequential top)
  2. US stocks are down YTD (consensus chases performance)
  3. SPY just broke one of my immediate-term TRADE lines of momentum support (1837)

 

So, I’m not buying-the-damn-bubble #BTDB today. Maybe tomorrow. Maybe not.

 

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

 

  1. Immediate-term TRADE resistance = 1848
  2. Immediate-term TRADE support = 1821
  3. Intermediate-term TREND support = 1779

 

In other words, for the 1st time in months the SP500 is signaling A) lower-highs vs the all-time closing high and B) a very immediate-term TRADE momentum line breakdown with C) fundamentals (#GrowthSlowing) hanging out in the background.

 

Sure, there are plenty of reasons to buyem. Flows in particular are tantalizing. But a stock market that goes down on Down Dollar and Down Rates (today), is a stock market that is worried about something I haven’t had to worry about for a year now = #GrowthSlowing.

 

Keep moving out there,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Not #BTDB Today: SP500 Levels, Refreshed - SPX

 


More Bad News for $TGT

Takeaway: Another bad news item bites Target.

TGT - Target eliminates 475 jobs, most at Minneapolis HQ

  • "Target Corp. laid off 475 employees Wednesday and said it will not fill 700 open positions…"
  • "The retailer declined to make an executive available for questions or say whether more layoffs are in the works. The company also wouldn’t say how many of the 700 open positions were based in the Twin Cities."
  • "The layoffs are Target’s largest since January 2009, when the nation’s second-largest retailer said it would cut 1,100 positions from its headquarters."

More Bad News for $TGT - target55

 

Takeaway: In the grand scheme of the over 360,000 people that Target employs, this is obviously a rounding error. We get that. However, symbolically, it kind of matters. Bottom line here is the company was already on a downward slope, and the recent data breach headlines plastered across TVs, mobile devices and computer screens across America delivered additional unwanted momentum. Look, Target has not been forced into cost cutting measures since January of '09 when the stock price was in the mid-30's. Not good.

 

Editor's note: This is an excerpt from Hedgeye Retail Analyst Brian McGough's morning research. In case you didn't already know about McGough, he's really good. Learn more about becoming a Hedgeye subscriber today.


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INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY

Takeaway: The upward momentum in long-term interest rates should resume shortly.

Two More Weeks Until the Market Gets What's Going On

The initial jobless claims data continues to paint a picture of a strengthening, though not overheating, recovery in the labor market. The most important takeaway that varies from consensus is that the data is sharply at odds with the very weak December NFP print that caused a rally in long bonds. We expect, based on this claims data, that dynamic to reverse when the January NFP print is released two weeks from tomorrow, on Friday, February 7th. 

 

Our preferred measure of looking at the claims data remains the year-over-year rate of change in the rolling non-seasonally adjusted initial claims. This week that measure was 469,817, which was down 7.9% from the 510,350 at the same time last year. This compares with the previous week's rate of improvement of 8.5%. On the margin, there was modest deceleration in the rate of improvement, but not enough to warrant emphasis. On a single week basis, an inherently more volatile series, the Y/Y change was 5.8% better, which was better than the previous week's 4.3% improvement. 

 

We continue to expect the 10-year treasury to re-test 3.00% on strengthening labor data that will become more apparent in ~2 weeks time. For more info on which stocks are best and worst positioned for a rise in rates, see our note from November 22 entitled "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials", which can be found HERE.

 

The Numbers

Prior to revision, initial jobless claims were unchanged at 326k WoW, as the prior week's number was revised down by -1k to 325k.

 

The headline (unrevised) number shows claims were higher by 1k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.75k WoW to 331k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.9% lower YoY, which is a modest sequential deterioration versus the previous week's YoY change of -8.5%

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 1

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 2

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 3

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 4

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 5

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 6

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 7

 

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 8

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 9

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 10

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 11

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 12

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 13

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 19

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 14

 

Yield Spreads

The 2-10 spread fell -2 basis points WoW to 247 bps. 1Q14TD, the 2-10 spread is averaging 251 bps, which is higher by 10 bps relative to 4Q13.

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 15

 

INITIAL CLAIMS: NFP CONFUSION BREEDS CONTEMPT ... TWO WEEKS TILL CLARITY - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


EARLY WAVE SEASON CRUISE SURVEY TAKEAWAYS

Survey was bullish for CCL on the margin, neutral for RCL, and slightly negative for NCLH

 

 

CCL:

  • Caribbean 
    • Carnival Brand pricing modestly improved sequentially
    • Pricing strength was particularly evident in F3Q, ahead of easy comps mid-Feb
    • Pricing remained modestly lower for the Western Caribbean/Mexico itineraries.
  • Europe
    • Costa pricing slipped sequentially; overall, Costa pricing is still up mid-single digits
    • AIDA pricing moved lower slightly.  Western Med and Western Europe were the laggards.
    • Princess saw some modest discounting – not surprising given its aggressive marketing for this Wave Season
    • Cunard pricing was slightly higher while Holland America pricing was flat
    • P&O Cruises UK saw good pricing gains in January
  • Alaska
    • Holland America sequential pricing was flat, though at modestly lower YoY prices
    • Princess discounted pretty heavily in the last month.

 

RCL:

  • Caribbean
    • RC brand pricing was flat sequentially and remain slightly lower YoY
    • Similar to FQ1, Celebrity discounted prices substantially  
    • Pullmantur pricing was unchanged since December
  • Europe
    • Rock solid pricing by the RC brand, up mid-to-high single digits.
    • Celebrity pricing was roughly unchanged sequentially, although significantly lower YoY
    • Azamara pricing was slightly lower
    • Pullmantur pricing showed decent growth considering very easy comps
  • Alaska
    • Both RC brand and Celebrity pricing were down close to double digits YoY with trend worsening
  • South America
    • Solid Galapagos pricing was the lone bright spot for the Celebrity brand

 

NCLH:

  • Caribbean
    • Pricing slightly fell sequentially in FQ1.  Summer YoY pricing was hovering near the flat line.
    • Getaway premium increased from 31% to 39% in Q1 and decreased to 37% from 56% in Q2.
  • Alaska
    • A big concern.  Pricing dropped significantly for FQ2 and FQ3. 
    • NCLH has 10% and 19% exposure to Alaska in FQ2 and FQ3.
  • Europe pricing looks outstanding in Q2
  • Hawaii summer pricing fell slightly 

 

EARLY WAVE SEASON CRUISE SURVEY TAKEAWAYS  - cc1

EARLY WAVE SEASON CRUISE SURVEY TAKEAWAYS  - cc2

EARLY WAVE SEASON CRUISE SURVEY TAKEAWAYS  - cc3

EARLY WAVE SEASON CRUISE SURVEY TAKEAWAYS  - cc4


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