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[video] Keith's Macro Notebook 10/24: China, Gold & UST10YR


RCL 3Q CONF CALL NOTES

Great Q and Q4 guidance. We have reservations surrounding 2014 guidance (management conceded low visibility) based on results from our pricing survey. We prefer CCL.


 

CONF CALL

  • 2014 will be 5th consecutive of further yield improvements
  • Guest surveys doing well
  • Caribbean a particularly concern; but premium (Oasis/Solstice class) continue to enjoy great pricing
  • Look forward for Caribbean to improve
  • NCC ex fuel per berth in 2013 has been lower than that in 2008
  • Average price of crude is 8% higher than that in 2008
    • Fuel consumption per berth has declined 14% since 2008
  • Pullmantur: struggling, biggest challenge; Spain economy continues to be big headwind. Pullmantur will open new Latin America office later this year.  Actively seeking to divest Pullmantur non-cruise businesses.
  • Must get double-digit ROIs
  • Restructing/consolidating charges: $12.2MM in 3Q, $13.9MM YTD;  global restructuring charges in the future -($10MM in 4Q, $16MM in 2014) 
  • 9 cent Celebrity Millennium impact
  • Ex Celebrity Millennium, net yields would have been up 0.4% bps or 3.0%
  • 25% Caribbean capacity in 3Q - performance in-line with expectations
  • Onboard very strong:  further spend from US customers in beverages, gaming, retail, shore excursions, specialty dining
  • Ex Millennium impact, NCC would have been 2.8%
  • $2.8BN in liquidity
  • 4Q
    • Competitive pricing pressuring Caribbean
    • Australia/Asia products are up
    • overall, shaping up better than expected
  • Encouraged by 2014 sailings - booked ahead last year on loaded 
  • Average booking window has been widened slightly
  • Caribbean yields:  flat to slightly down; currently booked ahead on 1Q and behind for rest of 2014
    • Expect more positive consumer cruising by end of Q1
    • +13% Caribbean capacity growth (most of the market capacity growth is in South Florida but RCL capacity growth will be in Glaveston)
  • Europe yields:  solid gains in pricing; demand from US, UK, and Ireland has been strong.  TTM Booking were up 25%.  Oasis of the Seas doing well.  Load factors ahead on mid-single digits.  Europe 20% of global portfolio.
  • Asia yields:  still cannot open up calls in Japan.  Most of 2014 itineraries will be based in Korea.  2014 capacity increase in Asia will be 20% (Mariner of the Seas moving to where Legend of the Seas was).
  • Expect to add 75 stateroom to each of the Voyager class ships over the next few years
  • Alaska:  10% of overall capacity; bookings/pricing 2014 ahead of last year and further yield growth.  Early 2014 performance is shaping up nicely. 
  • NCC ex fuel:  better than flat in 2014, aggressive target but achievable

 

Q & A

  • Oasis/Allure of the Seas:  leaders in Caribbean 
  • Caribbean:  last few weeks- nothing new worth noting
  • Promotional activity bottomed in Caribbean?  No answer.
  • 2014 guidance assumes environment stays consistent and promotional environment in Caribbean is status quo.
  • Mid-February will have lapped negative press
  • Europe:  surprisingly positive demand from US market.  
  • Onboard:  investments will continue to pay dividends into revenue growth into 2014 and beyond; 
  • 2014 net yield:  ticket yield will be up YoY; onboard yield will be up but not as much as 2013
  • Celebrity Millennium outage 
  • Repeat cruisers are contributing to the strong business performance
  • Shorter cruise itineraries in Caribbean (3-4 days) are struggling - where there are most 1st time cruisers 
  • Long cruiser itineraries in Caribbean are seeing some pricing gains
  • Absorbing Caribbean capacity well
  • 2013 3% net yield guidance breakout:  ticket +2-3%, onboard: +7%
  • Have expanded casino offerings, revitalised shore excursions
  • 2014 onboard low hanging fruit:  package shore excursions
  • Spa - healthy revenue, looking for opportunity to push pricing
  • Europe (Celebrity) - relatively optimistic over demand
    • Some comeback in Southern Europe (Germany) - particularly from affluent population
  • TUI Cruises have been extremely successful in Germany
  • 1Q 2014 booked in Caribbean:  2/3 booked
  • Asia onboard component has been attractive
  • No comment on possible additional capacity to Asia

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY

Takeaway: The PBoC’s recent tightening of monetary policy is in-line with our call for China to take a brief trip to Quad #3 on our GIP model in 4Q13.

SUMMARY BULLETS:

 

  • By refusing to auction new reverse repo contracts, the PBoC is tightening monetary policy, on the margin, by allowing liquidity to drain from the financial system on a net basis (-102B CNY over the past 2W vs. a trailing 13W average of +29.7B CNY and +150B 3W ago).
  • Aside from increased confidence stemming from the fact that the Chinese economy is on sounder footing, there are three primary reasons why the PBoC is implementing this strategy at the current juncture:
    1. Hawkish trends in the property market;
    2. Continued excesses in credit expansion; and
    3. A hawkish outlook for CPI over the intermediate term (unlike the politically compromised Fed, which uses lagging indicators to set monetary policy, the PBoC proactively adjusts monetary policy according to its growth and inflation outlooks).
  • As such, money market rates are increasingly reflecting this shift by the PBoC. To the extent this continues, our call for Chinese growth to slow in 4Q13 is strengthened. Leading indicators for Chinese growth are starting to signal this even in the face of this morning’s solid HSBC Flash Manufacturing PMI print (50.9 for OCT vs. 50.2 for SEP).
  • The insider-dominated Shanghai Composite Index (another one of our preferred leading indicators for Chinese growth along with the 10Y-2Y spread on MoF paper) is now bearish from an immediate-term TRADE perspective. The index is also failing to recapture its late-MAY highs – something we need to see before we think it’s safe to sign off on a buy-and-hold mean reversion strategy for Chinese equities.

 

Please note: If you have yet to review our SEP 25 note titled, “THE DEVELOPING BULL CASE FOR CHINA: PROGRESSING”, we encourage you to do so. The latter half of the report wraps some numbers around why we have yet to adopt an explicitly bullish fundamental bias on China after officially dropping what had been an overtly bearish bias back on SEP 6.

 

JUST CHARTS:

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China PBoC OMO

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Real Estate Climate Index

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Total Social Financing

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - CHINA

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Money Market   Rates Monitor

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China Iron Ore  Rebar and Coal YoY

 

IF YOU HAVEN’T YET HEARD, CHINA IS TIGHTENING MONETARY POLICY - China SHCOMP

 

Feel free to ping us with any follow-up questions.

 

Darius Dale

Associate: Macro Team


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[podcast] Why McCullough Wants to Puke

Hedgeye CEO Keith McCullough discusses the key market signals that matter on this morning's conference call and why he feels like he is going to puke.

 


HOT 3Q TAKEAWAYS

Please see the tables rating HOT’s Q3 performance and Q4 guidance below.  The release was typical HOT:  great quarter but low ball guidance for Q4.  We won’t review the whole quarter but here are some takeaways:

 

 

OVERALL HOT THESIS

  • We like the branded hotel business long-term – high ROIC, brands are underpenetrated overseas, asset light model, growth funded locally and not on HOT’s balance sheet
  • The transactions market really heated up in Q3 – see our Transactions note from 10/11/13 – both in terms of price per key and number of transactions
  • HOT should be more aggressive in selling assets next year
  • HOT should be returning more cash to shareholders as it moves closer (but not all the way) to the MAR model.  HOT raised its dividend, moved to quarterly dividend, and bought back a lot of stock (see chart below)
  • Company can lever up by at least a turn without jeopardizing credit rating
  • HOT’s European exposure is now a tailwind in our opinion and is likely contributing to HOT’s solid 2014 RevPAR guidance of 5-7% growth.  Our research in Europe indicates higher consumer activity.  The Hedgeye Macro Team is also bullish on the margin on the European consumer.  HOT generates the highest % of EBITDA from Europe of the branded US hotel companies.

3Q TAKEAWAYS

  • Non-room revenue consistently improving each of the last 3 quarters
  • CostPAR only increasing at a rate of 0.7x of RevPOR the last 2 Qs.
  • Fee growth was very good at 13% but 3% of that was termination fees
  • Owned margins were better but VOI margins were weaker than expected 
  • Excluded one-time items were actually gains and usually are - unlike casino companies that only seem to exclude bad stuff
  • Consistent with recent trend, Revpar gains are in direct order of price point – sadly, this is economic reality these days
  • Looks like only a half of a turn of leverage – this is ridiculously low, especially with likely more aggressive asset sales upcoming.  Leverage levels for Lodgers are near all-time lows.
  • Solid 2014 revpar guidance of 5-7% - likely better than expected
  • We expect them to be positive on the margin regarding Europe on the call

 HOT 3Q TAKEAWAYS - hot123

 

HOT 3Q TAKEAWAYS - hot234


Beware Out There

Client Talking Points

CHINA

The Chinese government removing liquidity is definitely having an impact. Officials clearly don’t want the property market to be this hot. So, despite another #GrowthStabilizing PMI uptick print of 50.9 in October versus 50.2 in September, the Shanghai Composite was down another -0.9% overnight. China is down -2.2% in the last two  days after breaking immediate-term TRADE support of 2189.

GOLD

Newsflash: This is the first time in at least a year that I am actually considering buying Gold. Now that’s not because I have a religion about it or anything like that. It's my signal that’s stabilizing for the first time in a year. We need to see $1316 hold. A breakout over $1345 would be explicitly bullish. Bernanke should be so proud of himself. Slow-growth investors, unite!

UST 10YR

Follow the flow. Rinse and repeat. The 10-year Treasury Yield snaps our Hedgeye TREND support of 2.58% and gold is stabilizing. Nope, there's no irony in that signal. Gold loves competing with absolute returns of 0%. Watch all your long “growth” styles. They have plenty of room to correct.

Asset Allocation

CASH 58% US EQUITIES 8%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 16%

Top Long Ideas

Company Ticker Sector Duration
DAX

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

I'll debate anyone, anywhere, on the history of burning your currency at the stake and its growth implications @KeithMcCullough

QUOTE OF THE DAY

If you want to know how rich you really are, find out what would be left of you tomorrow if you should lose every dollar you own tonight.
-William J. H. Boetcker

STAT OF THE DAY

The U.S. dollar has declined 1.1 percent against a basket of 10 leading global currencies in the last month. (Bloomberg)


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