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Dream Themes

This note was originally published at 8am on April 07, 2015 for Hedgeye subscribers.

“Deep into that darkness peering, long I stood there, wondering, fearing, doubting, dreaming dreams no mortal ever dared to dream before.”

-Edgar Allan Poe

 

Yesterday was the championship game for college basketball and like most NCAA tournaments, this one was full of its share of surprises.  To many (especially Wildcat faithful) the biggest surprise in the tournament was the premature end to Kentucky’s perfect season.  (Although after last night’s 5th national victory for Coach K, the Duke basketball faithful probably aren’t too concerned about Kentucky!)

 

The dream of a perfect season in NCAA basketball begins anew next season.  It has been 39 long years since Indiana, under Bobby Knight, last had a perfect season in 1976.  That’s a long time for basketball fans to wait for a proverbial “Dream Team”.  Luckily for all of you, once a quarter Hedgeye releases our "Dream Themes" and today at 11am ET we will be walking you through our Q2 2015 investment themes (ping sales@hedgeye.com if you haven’t already received the dial-in).

 

Clearly, we are being somewhat facetious in suggesting our quarterly investment themes are perfect.   But even if we aren’t perfect, every quarter we endeavor to highlight the top three macro-economic themes that we believe are most relevant.  To some investors, quarter-to-quarter thematic investing may seem counterintuitive. 

 

In a globally integrated economy that is increasingly being managed by governments and central bankers, we think nothing could be further from the case.  When the direction of the markets can be influenced by the simple changing of a single word in a central bank’s policy statement, frankly it is careless not to stay on top of the real-time changing currents in macro investing.

 

Dream Themes - central planning cartoon 01.04.2015

 

Back to the Global Macro Grind...

 

The key themes we will be discussing later this morning are highlighted below and as usual there will be heavy focus on the U.S. economy:

 

1. LateCycle USA: Employment, Inflation and Earnings follow an archetypic progression over the course of the economic cycle and always look best before the crest.  We'll detail where we are in the current cycle, the likely trajectory for this trinity of late-cycle macro indicators from here and how best to be positioned in the twilight of the current expansion.  

 

2. DemographicYields: Year after year in the post-crisis era, investors, economists and policy-makers alike have consistently seen their estimates for GDP growth, inflation and interest rates surprised to the downside. Perhaps there is some merit to the "secular stagnation" thesis most recently highlighted by Bernanke's blog. In this theme, we pull back the curtains on the impact of demographics on the domestic and global economy. The conclusion? Lower-for-longer...

 

 3. Oil's #DeflationDeck:Taking a birds-eye view of oil prices throughout the peaks and troughs in business cycles provides essential context as deflation's dominoes continue falling on a global scale. With the U.S. production machine changing the supply/demand dynamics in global energy markets, a deep-dive of this shift is key to generating sector-specific alpha into 2016 and beyond.     

 

Given the recent disappointment in U.S. employment, the #LateCycle USA is likely to be the most controversial to investors.  Specifically, on Friday the Labor Department’s data showed the U.S. added a mere 126,000 jobs in March.  The economic bulls of course will tell you, and there is some credence to their argument, that part of the fall in March was a one-time correction in the energy sector as domestic oil drilling adjusts to a new, and much lower, paradigm in oil.

 

In today's Chart of the Day, we take the longer view of the employment cycle and we show initial jobless claims going back to the mid-1960s.  The data in this chart quite clearly shows that if anything we are closer to the peak in the employment cycle than the trough.  More interestingly, as the chart also shows, employment improvement peaks, on average, 7 months before an economic cycle does. 

 

With the current expansion getting long in the tooth at 71 months versus a median expansion of 51 months,  you probably get very clearly why we think the most important current macro topic is to focus on where we are in the cycle.  In as much as we’d like to dream of economic cycles that expand in perpetuity, that’s not how the world works outside of academia.

 

In typical reactionary fashion, members of the Federal Reserve are now beginning to explicitly push out the so-called “dots”.  Yesterday Atlanta Fed President Dennis Lockhart, who is currently a voting member, said he favors a July or September “lift off” instead of June, with the caveat that most of the negative data in Q1 was transitory (which is how most economists classify data that doesn’t agree with their prevailing view).

 

The irony of course is that to the extent that the Fed doesn’t continue to be wrong on real-time economic data, and does at some point in the next couple of quarters get the chance to raise rates, the Fed will be signaling that we are likely in the longest economic expansions in the history of the U.S. economy.  This assumes that the Fed then raises rates through 2017, which would put the U.S. economic expansion at near 100 months!

 

Sounds like a bit of a dream to you? Well, us too.  And as Victor Hugo wrote about dreams in Les Miserables:

 

“There is nothing like a dream to create the future.”

 

Indeed.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.84-1.93%
SPX 2044-2094

VIX 13.63-16.21
YEN 118.98-120.49
Oil (WTI) 46.39-52.24
Gold 1180-1218 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research 

 

Dream Themes - 04.07.15


April 21, 2015

April 21, 2015 - Slide1

 

BULLISH TRENDS

April 21, 2015 - Slide2

April 21, 2015 - Slide3

April 21, 2015 - Slide4

April 21, 2015 - Slide5

April 21, 2015 - Slide6

 

BEARISH TRENDS

April 21, 2015 - Slide7

April 21, 2015 - Slide8

April 21, 2015 - Slide9

April 21, 2015 - Slide10

April 21, 2015 - Slide11
April 21, 2015 - Slide12


REPLAY | The Macro Show with Keith McCullough

If you didn't see The Macro Show this morning, we've got you covered. Watch the replay right here. 

 

 

 

The Macro Show is Hedgeye's pre-market rundown of what's happening in global macro where we offer insight on how you, the investor, can position yourself for the day ahead. We share 15 minutes or less of prepared market analysis and commentary and then answer your questions in a live Q&A session.


Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Cartoon of the Day: G(LOW)Bal Bond Yields

Cartoon of the Day: G(LOW)Bal Bond Yields - 10 yr yield cartoon 04.20.2015

"The UST 10YR Yield is at 1.87%, down 31 basis points year-to-date as lower-for-longer continues to get priced in," Hedgeye CEO Keith McCullough wrote earlier today. "The German 10YR is at 0.07% and the Swiss 10YR is at negative -0.21% this morning.


McCullough: Global Bond Yields Flummoxing Investors

 

In this brief excerpt from today’s institutional morning macro call, Hedgeye CEO Keith McCullough discusses the continuing descent of bond yields around the world.

 

Don't forget to SUBSCRIBE to Hedgeye on YouTube to see all of our videos as soon as they are published.


RCL Q1 2015 CONF CALL NOTES

Takeaway: Eastern Med issues and worse non-US onboard spend accounted for lower yield guidance. Asia (ex China) also mixed. The momo is over.

RCL Q1 2015 CONF CALL NOTES - 11

 

RCL Q1 2015 CONF CALL NOTES - 2

Source: RCL

 

CONF CALL

  • Anthem of the Seas has been 'quite profitable and generating strong returns'
  • Quantum of the Seas bookings in China has been 'heartwarming'
  • Double-Double program still on track
    • Hedgeye is skeptical
  • China now represents 6% of capacity at a higher level % of the company's profitability
  • Bookings curve moved forward since they marketed sailings earlier than usual; thus, less need to offer late-minute discounts
  • In March, adopted new policy that they will not offer late-minute discounting in North America (excluding 2-4 night itineraries). This may negatively impact short-term bookings but believe this is the right method over the long-term.
  • Strength in close-in pricing in Caribbean boosted Q1. Caribbean capacity had 69%.
  • Quantum had significantly higher premiums vs rest of fleet
  • At this point, Booking and APDs are higher vs same time last year
  • Previous guidance already incorporated better Caribbean pricing in Q2-Q4 
    • Continue to expect low single digit yield increase in Caribbiean sailing
  • Europe:  volumes slightly down vs 2014. Capacity up 5% YoY.  Strength coming down Baltic/Med doing well. Eastern Med are soft, particularly Turkey. Still see mid-single digit yield increase in 2015.
  • Asia:  in 2015, capacity accounts for 15%.  Asia itineraries, as a whole, has been trending well but individual itinerary's performance vary. Quantum is booked 80% for the summer 2015.  2016 is looking good as well.
    • We agree. As we wrote in "RCL: HOT ASIA BOOKINGS", Quantum bookings have been stellar. But pricing performance is mixed particularly with the older fleet underperforming in non-China itineraries.
    • Expect low to mid single digit yield increase.
  • Lower Fuel consumption due to better fuel initiatives. 
  • 2Q 2015: capacity mix: 37% Caribbean, 25% Europe, 10% Alaska, 10% China

 

Q & A

  • China: 66% more capacity in China this year.  Good yield growth but not double digit growth this time around.
  • Southeast Asia: yields are flattish.  
  • Australia:  yields are up slightly
  • Consumer pay bundled packages in non-US$
  • Onboard rev will still have a record year
  • 150bps change from Q2 -Q4 ; half of it on anticipation of weaker non-US onboard spend. Another half of it is on Eastern Med and new NA pricing pricing policy mentioned above
  • Is new NA pricing policy shared by their competitors? They don't think so.
  • Repositioning is great for Quantum but lower yields for everyone else who has repositioned.
    • We've been concerned about the underperformance of the pre-2006 fleet.
  • Why NCC ex fuel much higher in 2Q? mostly due to Quantum repositioning to China
  • Relative to guidance in October 2014, currency impact -$0.59, +$0.54 fuel impact.  Relative to guidance in Jan 2015, -$0.36 (-$0.15 (fuel), -$0.20 (FX).
  • Committed to keeping costs down this year and next year
  • 2-4 itineraries is only a small portion of their NA itineraries
  • FX impact onboard spend depends on exposure (see chart above)

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%
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