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3 Minutes

This note was originally published at 8am on June 10, 2015 for Hedgeye subscribers.

“If the 130,000 year period since modern humans made their first appearance were compressed into a single day, the era of modern growth would have begun only in the past 3 minutes.”

-Charles I. Jones

 

The 1st Chart of the Day below from Stanford Professor Chad Jones generated a fair amount of feedback after I presented it on our Morning Macro Show on Monday.  Using data from Maddison, it shows per capita GDP across a cross-section of economies all the way back to the year 1 AD.

 

I like the chart because it’s a simple but striking reminder that modern growth – in the form of sustained/endogenous growth and contemporary productivity functions – is still a fledgling phenomenon and central banking and monetary policy making are still very much an experiment in progress.

 

3 Minutes - CoD 1

 

Back to the Global Macro Grind…

 

A fundamental constraint of a daily strategy missive with a self-imposed ~900 word threshold and a finite production timeline of a couple hours is that you can’t boil the Macro ocean every morning. 

 

The format, however, does lend itself well to boiling the daily puddles of data and attempting to appropriately contextualizing those high-frequency macro morsels.

 

Yesterday we received the NFIB Small Business Confidence data for May along with the Job Opening and Labor Turnover Survey (JOLTS) data for April.   Tomorrow we’ll get the Retail Sales data for May. 

 

Why do people care about small business confidence?   

 

Small Businesses represent over 99% of total U.S. Employer firms and >60% of net private sector hiring on a monthly basis – and sentiment around the current and forward prospects for business activity are discretely related to hiring activity and labor compensation trends.

 

Further, a number of the sub-indices such as Hiring and Compensation Plans have served as solid lead indicators for the corresponding official figures reported by BLS.  For instance, as the 2nd Chart of the Day below illustrates, Small Business Compensation Plans have presaged actual compensation increases pretty well – typically leading growth in reported hourly earnings by ~3 quarters. 

 

Indeed, the strong advance in NFIB compensation plans over the last 24 months along with emergent strength in the Employment Cost Index (ECI) have backstopped consensus expectations for accelerating wage inflation for the better part of a year and a half now.  The current divergence between Compensation Plans and (lack of) actual earnings growth remains stark and whether the existent spread represents a structural dislocation or if the cycle high +2.3% growth in hourly earnings reported in May represents the beginning of a lagged convergence remains to be seen. 

 

Wage inflation is a canonical late cycle indicator so it certainly wouldn’t be surprising to (finally) see some degree of acceleration as the payroll expansion reaches its 63rd month off the February 2010 employment trough.  At the same time, with the profit cycle past peak, the prospect of incremental margin pressure via acceleration in labor line costs does not argue for a step function increase in corporate capex spending – particularly with aggregate global demand flagging and the worlds core consumption demographic of 35-54 year olds remaining in secular retreat.   

 

Why do people care about the JOLTS Data?

 

#Churn Baby!

 

While the NFP data offers the official read on net hiring, the JOLTS data provides the internals on the gross flow of both hirings and separations.  A hallmark of an efficient and well functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match. 

 

On a gross basis, 5.007 million people were hired in May (kind of surprising relative to the NFP figures of 100-200K we’re used to hearing, right?) while 1.8 million were laid off or fired and 2.7 million people quit their job.  Job Openings, meanwhile, made a new all-time high of 5.38MM while the Quits Rate continued to approach prior cycle highs. 

 

Granted, the historical data only go back to 2000 so it’s hard to take an overly convicted view as far as a conclusion.  But as it stands, the domestic labor market remains solid with many metrics at or approaching prior cycle highs – which is probably the larger point.   As we summarized in an institutional note last week: 

 

Tops are processes & “late-cycle” is not some discrete peak on a Macro sine curve. Move while the music plays but don't be willfully blind to the #LateCycle reality of it all. 

 

Why do people care about Retail Sales?

 

A better first question may be:  What is Retail Sales?

 

It’s a trivial, but not an insignificant question.

 

In casual conversations with investors, particularly those who aren’t Macro centric, I’d say a majority don’t technically know what Retail Sales encompasses.   Superficially, the term “Retail Sales” kind of connotes that it’s a broad measure of the 70% of the economy that is consumer spending – and most people take it that way.  

 

In fact, Retail Sales is an estimate of spending at department stores, food service providers, auto dealers, and gas stations.  In other words, it is largely an estimate of spending on goods. 

 

In other, other words, while it’s a timely, insightful barometer of the prevailing state of domestic consumerism, it doesn’t include spending on services, which comprises the lion’s share of consumption at ~2/3 of household spending and ~45% of GDP

 

The numbers are also volatile on a month-to-month basis, subject to significant revision and reported on a nominal basis – making it difficult at times to distinguish whether sales trend changes are due to prices or volumes.  What it offers in terms of timeliness, it lacks in terms of precision and magnitude.

 

Anyhow, the May figures should be markedly better sequentially.  The acceleration in auto sales to 17.7MM (annualized) in May vs. 16.5MM in April will buttress the monthly figures.  Further, consumer revolving credit growth (i.e. credit cards) and spending on durables goods tend to move in directional tandem and with revolving credit rising +11.6% month-over-month annualized in April, it wouldn’t be surprising to see some measure of that show up in the May Retail Sales figures or in a positive revision to the April data.  

 

Also, it’s worth highlighting that realized improvement in May would only serve to take the year-over-year growth rate up to something like +1-2% - a sequential improvement but a far cry from the cycle peak of +5% growth observed mid-year last year. 

 

…Having exceeding my character count threshold, I’ll abruptly/awkwardly end the macro miscellany there.  With Keith on the road, you’ll have sufficient opportunity to suffer my pedestrian attempts at dazzling distillations of domestic eco data over the balance of the next two weeks.   

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.06-2.52%

SPX 2072-2100
Nikkei 20006-20469
VIX 13.76-15.40
Oil (WTI) 58.64-61.75 

Gold 1170-1199 

 

To historical context and the profitable boiling of puddles,

 

Christian B. Drake

U.S. Macro Analyst

 

3 Minutes - CoD 2


The U.S. Dollar, Nikkei and Yields

Client Talking Points

USD

There was a clean cut overbought signal for the USD vs EUR and Yen yesterday (see Real-Time Alerts product for timestamps) as the EUR/USD tested the low-end of its 1.11-1.14 risk range and is now bouncing on the Greek headlines.

NIKKEI

Get the Dollar (and Yen right), you’ll get Japanese stocks right – big rally in the Nikkei to its highest level since 1996 and with the Yen bouncing here this morning vs USD we would be booking some of those Nikkei gains as it is signaling overbought at 20,899.

 

YIELDS

Another day, another line of storytelling on why “bond yields are going to breakout” (this time it was our bull case on #HousingAccelerating, which we get – but please don’t look at the Durable Goods print of -2.5% year-over-year!) – 10YR pulls back -4 basis points to 2.37% this morning with no support to 2.18%; great spot to short the Financials and buy Long-term Bonds with those U.S. and Japanese equity gains.

 

**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET, with Macro Analyst Darius Dale, Restaurants & Consumer Staples Sector Head Howard Penney and CEO Keith McCullough will be dialing in.

Asset Allocation

CASH 36% US EQUITIES 8%
INTL EQUITIES 12% COMMODITIES 14%
FIXED INCOME 27% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
PENN

Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May. This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...).

ITB

It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance. The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years. Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.

TLT

Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't? All told, it was a great week sticking with the process on the long side of bonds. Here we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.

Three for the Road

TWEET OF THE DAY

Can a Strong Housing Market Carry Economic Expansion? https://app.hedgeye.com/insights/44835-can-a-strong-housing-market-carry-economic-expansion … via @hedgey

@KeithMcCullough

QUOTE OF THE DAY

The best way to have a good idea is to have a lot of ideas.

Dr. Linus Pauling

STAT OF THE DAY

Hawaii is now the first state to raise the minimum smoking age to 21, effective January 1, 2016.


The Macro Show Replay | June 24, 2015

 

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

June 24, 2015

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BULLISH TRENDS

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BEARISH TRENDS

 

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Cartoon of the Day: Stinkin' Euro

Cartoon of the Day: Stinkin' Euro - Euro cartoon 06.23.2015

Despite a recent bounce, the euro has fallen 18% since this time last year.


CCL F2Q 2015 CONFERENCE CALL NOTES

Takeaway: CCL today confirmed the European challenges we have been highlighting. It is responsible for revenue yield guidance not being raised.

CCL F2Q 2015 CONFERENCE CALL NOTES - 1

 

CCL F2Q 2015 CONFERENCE CALL NOTES - 2

 

CONF CALL

  • Carnival brand: Double digit improvement in ticket revenue yields
  • Overcame European brand challenges from macro/geopolitical challenges
    • We have been stressing European pricing as a risk
  • Will deploy 4m cruise berths in 2016 in China
  • China outboard travel expected to double in 2020
  • Princess will be deployed in China in 2017
  • China represents 5% of CCL's guests
  • Onboard revenue +6% in constant dollars in F2Q
    • Successful rollout of our casino engagement program, beverage packages and additional bandwidth are just a handful of examples of initiatives that drove onboard strength
  • Remain on track for $70-80m savings
  • Will step up marketing costs in 2H 2015
  • Caution investors on ongoing macroeconomic and geopolitical risks not to get ahead of expectations for the year simply based on consistency and exceeding quarterly guidance.
  • Remain committed on double-digit ROIC growth target.
  • F2Q 
    • Beat driven by: better onboard/other yields, lower opex due to timing of costs, and better fuel/FX impact
    • Capacity up 2% - NA (flat), EAA (+6%) 
    • Net ticket yield: +3.5%
    • Improvement particularly strong in North America
    • Net fuel/FX benefited F2Q by 10 cents
  • FY 2015: anticipate $27m in restructuring costs, not included in guidance
  • Bookings for next 3 quarters have been strong; volumes ahead at slightly lower prices
  • At this point in time, cumulative fleet-wide bookings for the third quarter are well ahead at slightly lower prices but again driven by the unfavorable transactional currency impact. 
    • Caribbean itineraries are significantly ahead on occupancy at slightly lower prices, which bodes well for pricing on future bookings and pricing in the last six weeks has been higher. 
    • Alaskan itineraries are nicely ahead on both price and occupancy. 
    • All other North American brand deployments combine which includes the seasonal European program are highly ahead on occupancy but at lower prices which are being unfavorably impacted by transactional currency.
    • For EAA brands, all itineraries combined are nicely ahead on price with occupancies that are in line with the prior year. 

Q & A 

  • Why is the constant currency guidance unchanged despite the meaningful beat in the second quarter? Mostly Europe 
    • (Strong bookings there, which implies awful pricing)
  • Costa having trouble with yields. Lots of macroeconomic difficulties in Europe. 
  • Pricing discipline in Caribbean: CCL will continue to try to put pricing integrity in and discipline in for our brands independently of what anyone else does.
  • Advertising increases - not related to higher promotional spending
  • 3.7% capacity increase in 2016; 1Q 2016 ahead on occupancy; cautiously optimistic on 2016
  • Book load position: less inventory on bookings for rest of year
    • We think it's impacted by shift of Wave Season by a couple of months
  •  Anticipate LNG will be fuel of choice
  • Air/transportation: expect 20-25% improvement in costs
  • Onboard yields have been strong on NA brands. Weaker in EAA brands. 
  • MERS impact: Have itineraries from China that touch Korea and have modified some itineraries
  • Continue to see yield strength in China
  • In the next 3-4 years, CCL should hit double digit yields
  • Real competition for new cruisers is land-based
  • CCL wants the competition to advertise and promote
  • In the past, given $600m in advertising spend; this year will be 'few % points higher'
  • Overall 1st time cruisers are up dramatically - part of it due to China, another part of it due to the Caribbean since there was so much capacity last year.  The only way to fill those ships was to get a lots of new first time cruisers. 
  • New ship capacity: 6,600 is total capacity; passenger capacity is just north of 5,000 
  • No impact from China river boat incident
  • Assumed onboard spend rising 2% in 2H 2015; more challenging comps in 2H 2015
  • More dry docks in 2015 driving up costs by 2-3%. Expect dry docks to decline in 2016 (about half of 2015 increase will go away).
  • European capacity up 6% in 2015 but nowhere near double digit Caribbean capacity increase last year. So can't blame it on capacity.

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 80.65%
  • SHORT SIGNALS 78.63%
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