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Rose Colored Bubbles

This note was originally published March 06, 2014 at 08:08 in Morning Newsletter

What’s in a name? That which we call a rose by any other name would smell as sweet.” -William Shakespeare

The big picture

What’s in a bubble?

 

I’ve been channeling my inner 1999 for the last 3-days in California. I’ve done Los Angeles, San Diego, and San Francisco. And while it would be cute to tell you that I can actually smell a bubble, these types of things don’t have a particular scent.

 

Rose Colored Bubbles - bub

 

At the all-time highs, they just look sweet.

Macro grind

All-time highs? Yep. It’s not just Yelp (YELP) and Facebook (FB). It’s Barney Frank’s American Housing dream. The all-time highs in the largest component of American cost of living are here. It’s called rent.

 

Oh, you don’t rent? Ok, you’re like me then. You’re big time – you own. But don’t confuse the 20% of us who are long asset price inflation with the rest of them (80% of Americans) who get pulverized by Policies to Inflate. The cost to live in this country has never been bubblier.

 

What’s in the cost of living?

  1. Shelter
  2. Food
  3. Transportation

Unless you’re like the “folks” in Washington who take car service to work, you have to put gas in the transportation thing too. And if you can’t afford a car, you can always save some money and take the bus, or walk…

 

What’s in the all-time high in American “inequality”?

  1. The Housing Bubble
  2. The Commodity Bubble
  3. The Bond Bubble

One by one, central planners at the Fed blow these bubbles up so big that, like Jim Carey in The Truman Show, we start to live inside them. There’s an effervescence to that, I guess.

 

Or at least that’s what Oaktree’s Howard Marks said in our back to back presentations at the CFA Society’s Annual Forecast Dinner in San Diego on Monday night.  He called the cov-light-pik-toggle-bond thing being “back” – an “effervescent bubble.”

 

As we went back and forth in the Q&A part of the event, Marks made an astute observation about real-world life. The average American has $20,000 in post tax income, but spends approximately $22,000 a year.

 

So, if you ramp up the Top 3 things Americans have to pay for (if they don’t pay for their kids to go to school), the Bush/Obama/Bernanke/Yellen Policy to Inflate should drive cost of living up to say $25,000-30,000/year. That’s why the US Savings (as a % of disposable income) is retracing its 2008 crisis lows. Like their government, Americans once again have to borrow to spend.

 

In other news, inflation slowed US consumption growth again in February:

  1. USA’s ISM Services report for FEB (reported yesterday) slowed to its lowest level since FEB of 2010
  2. The Employment component of the ISM Services Series dropped < 50 (largest m/m drop since NOV 2008)
  3. US Services PMI (Markit data series) slowed from 56.7 in JAN to 53.3 in FEB

No worries though, it’s all “weather.”

 

If you want to join the Federal Reserve and believe that (and tell the 80% that inflation doesn’t slow growth), you can start turning on the Weather Channel and buying the all-time highs in social media every day they forecast yesterday’s sunny news.

 

I’ll be selling stocks (and buying Commodities, Bonds, and Foreign Currencies) into that. Because, like in Q1 of 2011, Down Dollar and Down Rates were signaling a US consumption growth slowdown inasmuch as they did in Q1 of 2008.

 

As for retracing my California travels of 1999, Q1 of 2000 wasn’t exactly the time to be wearing rose colored glasses either.

Asset Allocation

  • CASH: 31%
  • US EQUITIES: 3%
  • INTL EQUITIES: 10%
  • COMMODITIES: 16%
  • FIXED INCOME: 20%
  • INTL CURRENCIES: 20%

Our levels

Our immediate-term Macro Risk Ranges are now:

 

UST 10yr Yield 2.59-2.75%

SPX 1848-1879

VIX 13.01-15.64

USD 79.86-80.43

Brent 107.31-110.02

Gold 1319-1351

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Rose Colored Bubbles - San Fran HPI


LO: Adding Lorillard to Investing Ideas

Takeaway: We are adding cigarette-maker Lorillard (LO) to Investing Ideas.

Hedgeye is adding Lorillard to Investing Ideas today. 

 

We will send out a full report from analyst Matt Hedrick detailing our bullish case on the 254-year old cigarette-maker before the weekend.

 

LO: Adding Lorillard to Investing Ideas - lor


ECB Presser: Lots of Words, No Action, Markets Calm

As expected, this morning the ECB announced no change to its main interest rates.

 

ECB President Mario Draghi reiterated much of the same policy stance and outlook since his December meeting of last year. The EUR/USD rallied throughout the conference.

 

Draghi again stressed that the Eurozone may experience a “prolonged period of low inflation”, that the Bank would maintain accommodative monetary policy for “as long as is necessary”, and to expect that key rates would remain “at present or lower levels for an extended period of time.”

 

What was not spoken?   Draghi did not include measures to suspend sterilization of the SMP, leaving it as an instrument for future consideration. He also spoke of no concrete plans to free up credit to the “real” economy (SMEs in particular).  Draghi gave the following reasons on why the ECB took no action today:

  • Baseline forecast confirmed, with modest economic recovery
  • News out since last meeting, by in large on the positive side
  • PMI data is strongest in 2.5 years
  • PMI services a huge component of job in the region, very positive
  • Metric gaps between Germany and Spain &Italy narrowing
  • Unemployment high, but stabilized

 

Updated Staff Projections for March versus December moved ever so slightly on the 2014 outlook, boosting GDP 10bps higher, and inflation 10bps lower:

 

GDP Staff Projections:  1.2% in 2014 (+10bps vs DEC); 1.5% in 2015; 1.8% in 2016

CPI Staff Projections:  1.0% in 2014 (-10bps vs DEC); 1.3% in 2015, 1.5% in 2016

 

 

Other Key Takeaways from Draghi:

  • Eurozone government deficit is expected to have declined to 3.2% of GDP in 2013 and is projected to be reduced to 2.7% of GDP in 2014
  • Eurozone government debt is projected to peak at 93.5% of GDP in 2014
  • Emerging Market impact on Eurozone has so far been muted.  In fact there have been flows into Europe that have helped to narrow the spreads between countries
  • On Ukraine: Draghi said he does not suggest strong contagion. But geopolitical risks could become substantial and generate significant consequences. The Bank has not assessed scenarios.
  • On the Eurozone slipping into Japan-like Deflation: Draghi said ECB has taken early and decisive action on monetary policy to prevent anything like Japan’s situation. He remains confident in the 2% inflation anchor.
  • To read a copy of Draghi’s prepared remarks click here.

 

Investment Positioning:

  • We remain marginal European equity bulls of US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB) – note that today the BOE also left the main interest rate unchanged (at 0.50%) and maintained the asset purchase target (as expected), which is supportive of our long call. The GBP/USD is up +2.4% in the last month.
  • Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.
  • EUR/USD: we expect Yellen to likely pull back on the tapering program to a more dovish position that should weigh on the USD to the downside. See our levels below. 

ECB Presser: Lots of Words, No Action, Markets Calm - zz. EURo

 

Matthew Hedrick

Associate


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INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST

Takeaway: We continue to see a gradual, but steady, deterioration in the rate of improvement in the labor market that began seven weeks ago.

The Labor Market Continues its YTD Cooling Trend

Labor market data continued its deteriorating trend this past week, bringing to almost seven the number of consecutive weeks this has been happening. Notwithstanding a brief studder-step two weeks ago the progression of the labor market data has been progressively negative every week for almost the last two months, or, alternatively, since the start of the year. As a reminder, we look at the year-over-year rate of change in the rolling NSA initial claims. Specifically, we look for inflections in the trendline rate of improvement as the series naturally converges towards zero as the economy reaches full steam. Here are the last seven data points with the most recent data point first: -3.5%, -4.4%, -5.6%, -5.1%, -5.7%, -7.3%, -7.9%, -8.5%. Since we're looking at the rate of change in year-over-year initial jobless claims a more negative number is better as it implies a faster rate of improvement. 

 

To be clear, we're not yet sounding the alarm on the labor market, but it's important to note that the rate of improvement is decelerating steadily and if that trend continues then we could see, in the not too distant future, the labor market reverse course, i.e. claims begin to rise.

 

The Numbers

Prior to revision, initial jobless claims fell 25k to 323k from 348k WoW, as the prior week's number was revised up by 1k to 349k.

 

The headline (unrevised) number shows claims were lower by 26k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2k WoW to 336.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -3.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -4.4%

 

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 1

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 2

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 3

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 4

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 5

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 6

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 7

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 8

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 9

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 10

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 11

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 12

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 13

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 19

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 14

 

Yield Spreads

The 2-10 spread rose 4 basis points WoW to 238 bps. 1Q14TD, the 2-10 spread is averaging 242 bps, which is higher by 1 bps relative to 4Q13.

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 15

 

INITIAL CLAIMS: NEGATIVE LABOR MARKET TRENDS PERSIST - 16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Blue Skies On the Horizon For Carnival?

Takeaway: In our most recent cruise pricing survey, Carnival (CCL) emerges as the standout, while Norwegian (NCLH) is still struggling a bit.

Editor’s Note: This is part of a research piece originally published on March, 5 2014 at 3:40 PM in Gaming, Lodging & Leisure. For more information on how Hedgeye can help you, click here.

 

Blue Skies On the Horizon For Carnival?  - carnival

 

Have you been outside lately? It’s been a brutal winter for most Americans. But now, with snowstorms abating, are consumers still booking vacation cruises to sunnier destinations?

 

In the Caribbean, we saw discounting across the board among the lower priced itineraries in the Caribbean in mid-February, but the Carnival (CCL) brand pricing stood out in March, outperforming its peers.

 

Carnival sequential pricing picked up among the Eastern Caribbean itineraries. More importantly, sequential pricing rose among the Western Caribbean itineraries for 2H 2014.

 

Blue Skies On the Horizon For Carnival?  - cruise

 

This is encouraging given that Western Caribbean pricing has lagged. While Caribbean pricing overall remains sluggish and pricing has been quite volatile in the busy, promotional period of Wave Season, we continue to see Carnival as best positioned due to easy comps and low Street expectations.

 

Not surprisingly, the picture is starkly different in Europe. The Royal Caribbean (RCL) brand and Norwegian (NCLH) are leading the charge in a rosy booking and pricing environment. CCL has the most exposure to Europe but it is still trying to find a solid footing there with mixed pricing performance in March.

 

The Ukraine-Russia situation could be a wild card.

 

So far, no Black Sea sailings have been rescheduled or canceled on RCL and CCL brands. There’s speculation that Baltic Sea itineraries could eventually be impacted; that would be significant for CCL and RCL if it happens.

 

Alaska will be the weakest market pricing wise in 2014 – who wants to go somewhere cold nowadays?

 

While our study focused on sequential pricing trends and pivots, we would point out that YoY pricing for Carnival is up significantly due to the lapping of the Triumph fire incident in 2013. RCL and NCLH face more difficult comparisons in the Caribbean.

 

The Street is finally catching onto the low bar set by Carnival as even the most bearish sell-side have been raising yield and EPS estimates for CCL before they report earnings in three weeks. According to Factset, recent FY2014 estimate changes have trended around the $1.75 EPS range (at the upper end of CCL’s $1.40-$1.80 guidance). Our $1.90 EPS and 0.3% yield forecast for FY2014 remains unchanged from our note in December “CCL: $2 ON THE HORIZON.”

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