Chile’s Lower Highs

Conclusion: We’re short Chilean equities ahead of consensus coming around to our intermediate-term outlook for the slope of both Chilean domestic growth and global growth – negative.


While the sell-side runs around like a chicken with their heads cut off recommending buying everything Emerging Markets after they’ve been tagged for the last 3-6 months, we’ll stick to the script until it changes: Growth Slowing as Inflation Accelerates. Of course there will be plenty of buying opportunities once our call gets fully priced into global equity markets; for now, however, we don’t think consensus is in the area code of Bearish Enough.


Much like the US, Chile is one economy where consensus gets the “accelerating inflation” component of the thesis, which is highlighted by the Chilean Central Bank being the most hawkish in the world over the last year, raising rates +350bps in response to CPI accelerating from +0.3% YoY in Feb ’10 to +2.7% YoY in Feb ’11.


Chile’s Lower Highs - 1


The central bank’s recent acceleration of rate increases (from +25bps to +50bps increments) actually caught 19 of 22 forecasting economists off guard, particularly given that they tightened in the face of Japan’s crisis despite Japan being Chile’s second-largest export market. Taking their cue from the central bank, consensus’ CPI forecasts for 2011 are on the rise of late:


Chile’s Lower Highs - 2


Of course there may be a time over the next year(s) when increased Japanese demand for raw materials is bullish for Chilean Exports, but for now, we will avoid the rookie trap of Duration Mismatch and play the game in front of us, which is one of slowing growth. To be specific, we expect Chilean GDP growth to top out in 1Q and rollover substantially through the end of the year alongside waning global growth fueled by structurally lower levels of Chinese, European, and US demand. Difficult comparisons in 2H11 augment this view.


Chile’s Lower Highs - 3


Lastly, Chilean equities remain broken from a TRADE & TREND perspective and today’s rally up to another lower-high coincidentally closed just under our immediate-term TRADE line of resistance – a ripe shorting opportunity indeed.


Darius Dale



Chile’s Lower Highs - 4

Portuguese Government on the Brink

Positions in Europe: Short Italy (EWI); Short Spain (EWP)


As an update to our research note on 3/16 titled “Portugal Shakes on Debt Dues”, today we heard from Portugal’s PM Minister Jose Socrates that he increasingly believes that the main opposition party (the centre-right Social Democrats) are not willing to agree with his additional austerity programs to further trim the country’s budget deficit at tomorrow’s parliamentary vote. Socrates has previously announced that if the plan is rejected he would likely resign.


Should austerity be voted down tomorrow and Socrates call his resignation, which is looking increasingly probable, we’d expect the political indecision to heighten the need for and shorten the duration of a bailout from the European Financial Stability Facility (EFSF) to help shore up a hefty schedule of sovereign debt coming due over the next months (see chart below).


Socrates and his minority Socialist party’s new austerity plans aim to control operational and administrative expenses in the public sector. Given that the government on Monday recognized that annual GDP in 2011 will be -0.9%, versus a previous estimate of +0.2%, the government’s deficit reduction program over the next three years looks increasingly overly “optimistic”, as negative growth will further impair revenues need to pay down its deficits. The government’s budget deficit plan is: from 9.3% of GDP in 2009 to 7.3% in 2010, 4.6% in 2011, and to the EU limit of 3% in 2012.


If Socrates were to resign, a general election would follow; given the country’s constitution snap elections could be held at the earliest 55 days after called.


Tomorrow could well be another volatile day for Portugal and across European markets. Keep your head up.


Matthew Hedrick



Portuguese Government on the Brink - por1


Portuguese Government on the Brink - por2   



Bookings and forward pricing have been relatively strong but no visibility on Middle East impact.



"Despite the uncertain world events that have unfolded during our peak booking period, we have experienced a solid wave season.  Ticket prices for the peak summer season remain particularly strong. The convenience and affordability of a cruise vacation continues to gain recognition as consumers discover the unrivaled experience cruising offers. As a result, long-term fundamentals for our business remain attractive in an environment where consumers increasingly value the importance of taking their holidays. [On 1Q results] Net revenue yields increased 2 percent (constant dollars) driven by a significant improvement in ticket prices for our European brands. We remained focused on managing costs and reducing fuel consumption. All of which more than offset rising fuel prices during the quarter."

- Micky Arison, Carnival Corporation & plc Chairman and CEO


  • 1Q2011 results:
    • EPS: $0.19
    • Constant dollar net revenue yields: +2% (in-line with guidance)
    • Gross revenue yields: +2.4%
    • Constant dollar net cruise costs (ex. fuel): +1% (higher than guidance of flat to +1%)
    • Fuel: +9% to $543/metric ton (vs. guidance of $526), costing $0.05 EPS
  • 2Q2011 guidance
    • Constant dollar net revenue yields: +1.5% to 2.5% (+4.5% to 5.5% on current dollar basis)
    • Constant dollar net cruise costs (ex. fuel): +2-3%
    • Fuel: $659/metric ton
      • Fuel costs for Q2: $140MM or $0.18 EPS drag
    • EPS: $0.20-0.24 (Consensus: $0.33)
  • FY2011 guidance:
    • Diluted EPS: $2.55-2.65 (above March 11 guidance of $2.50-2.60)
    • Constant dollar net revenue yields: +2.5% to 3.5% (lower than guidance of +3% to 4%)
    • Current dollar net revenue yields: +4.5 to 5.5%
    • Constant dollar net cruise costs (ex. fuel): flat to +1% (higher than guidance of -0.5% to +0.5%)
      • Slightly lower expectations in other cost categories are expected to offset the slightly higher net cruise costs guidance
    • Fuel: $631/metric ton (higher than guidance of $527/metric ton)
      • Fuel costs for FY2011: an increase of $355MM over previous guidance or +$489MM, costing $0.45 EPS.
      • However, a weaker US$ since guidance will benefit earnings by $75MM or $0.09 EPS
    • Debut of 2 ships in 2Q: AIDA Sol and Carnival Magic


  • Capacity increased 5%; EAA brands up 11% (9% coming from South America); NA brands up 2%
  • In 1Q: 4 cent benefit from cost cutting measures; 2 cent adverse effect from fuel
  • Ticket yields
    • NA brands: down because of higher Caribbean capacity;
  • Normalized on-board spend and other yields: +3%
  • 2011FY guidance:
    • Seeing inflationary pressures in crew travel, food costs, freight and other areas
    • Interest expense, taxes and depreciation are lower, which offset some of the inflationary pressures.
    • 10% change in the price of fuel for the remaining three quarters of 2011 represents a $0.22 per share impact.  With respect to FX movement, a 10% change in all currencies relative to the U.S. dollar and also for the remaining three quarters of would also impact our P&L by $0.22 per share. 
  • 2011 booking picture: occupancies are slightly lower than a year ago on a 5% increase in Cruise capacity for the next three quarters.  Ticket pricing for these bookings are nicely higher than last year.
  • North American occupancy is slightly behind last year with higher pricing.  Bookings for EAA are also slightly behind at last year at higher prices.
  • North American wave bookings have paced the increased North American capacity with solid increases in YoY pricing.  In EAA, bookings have also been higher during this wave period at approximately the same YoY prices.
  • However,  the booking pace has lagged the 8.6% capacity increase for the period
  • Middle East unrest:
    • 280 cruises had to be reset
    • $0.05 EPS adverse impact
  • 2Q guidance
    • Fleet-wide capacity: +5%, +2.9% NA, +8.6% EAA
    • Occupancy flat
    • NA brands: 55% Caribbean
    • NA pricing: higher YoY; occ. flat
    • Caribbean pricing: slightly lower than 2Q 2010
    • EAA brands: 54% European
    • EAA pricing: higher YoY
    • Fleet-wide local currency revenue yields will be higher for both NA and EAA brands.
    • European yields higher YoY but lower than originally expected due to ME unrest
  • 3Q guidance:
    • Capacity: +4.8%, +3.4% NA, +7.2% EAA
    • Pricing ahead with lower occupancies
    • NA brands: 36% Caribbean, down from 41%; 23% in Alaska; 25% in Europe
    • EAA brands: 88% European
    • Pricing for all North American brands itineraries in the third quarter is ahead of last year, with particularly higher occupancy than pricing in this year's Alaska season.
    • Caribbean pricing higher YoY, but on lower occupancies.  
    • EAA pricing is nicely ahead of last year at slightly lower occupancies. 
    • EAA bookings in the last five to six weeks have been challenging.
    • Fleetwide pricing up for both NA and EAA
  • 4Q guidance:
    • Capacity: +5.9%, +3.3% NA, +10.1% EAA
    • Pricing higher YoY, occu. lower YoY
    • NA brands: 42% Caribbean, down from 50%; 14% in Europe; 10% Asia
    • Pricing NA: higher YoY; lower occupancies
    • EAA brand: 72% European, up from 65%
    • Pricing EAA: higher YoY
    • Occupancies are lower for Europe, not surprising given the 20% increase in European brand deployment for 4Q


  • Pulled out of all North African stops in Tunisia and Morocco and Egypt.
  • Slowdown last 2 weeks: It's Ibero and Costa with heavy emphasis on North Africa and Middle East itineraries.
  • NA brands reaction to ME unrest has been "muted"
  • Still hard to judge ME impact--"too much noise"
  • Guidance: Lower occupancies to compensate for higher prices
  • FY 2011: FCF of $1BN; 2011 dividend would be $700MM
  • Board will decide any share buybacks or dividends
  • Starting process of rethinking fuel hedging program
  • NA pricing: good strength in those premium brands for longer cruises, European programs, Alaska programs and for Caribbean programs
  • Higher ticket prices could be due to strong demand for Alaska
  • Europe bookings strong despite lower occupancies
  • D&A and interest expense downward revision:
    • Some brands were aggressive about when they would put those maintenance CapEx items into service.  We saw some favorable impact in 1Q and we flowed that through for the year.  It's just a timing of when things go into service. Same reasoning for interest expense (i.e. favorable impact in 1Q)
      • Tapping commercial paper market more aggressively
  • ME unrest positively impacting Alaska? No. Strong bookings were already in place. Plus, capacity is down in Alaska.
  • Northern Europe doing well.
  • Caribbean pricing is holding up better with lower capacity in summer.
  • Costs are also higher in 2Q due to higher advertising expense, not due to rebooking trends.
    • Their cost forecasts are derived from projections from 10 Miami companies, which are usually conservative.
  • 3Q yield guidance down half a point due to Middle East
  • Comfortable with 2-3 new ships/year
  • Higher end consumer driving pricing
  • Ex ME, booking window as expected.
  • 2012 bookings are encouraging at this time
  • Caribbean pricing is strong in 4Q

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Short Selling Opportunity: SP500 Levels, Refreshed



We like to put our research views on the tape. That’s what I did on March 16th in a note titled “Short Covering Opportunity.” That’s what I am doing right here and now immediately after shorting the SP500.


While our fundamental view of Global Growth Slowing As Inflation Accelerates is becoming a consensus, that doesn’t mean consensus can’t keep being right where it matters most – in being priced into the US stock market.


Alongside The Bernank perpetuating The Inflation we’ve seen a breakout in Price Volatility (VIX). Amidst the 3-day rally we just saw in US stocks from their immediate-term TRADE oversold lows, the VIX has held its intermediate-term TREND line of 18.03.


This is not an ‘end of the world’ short position. I think of it as a high-reward versus risk short position that I can average up into if today’s spot isn’t precisely right. Provided that the SP500 doesn’t close above my TRADE and TREND lines of 1310 and 1343, respectively, Mr. Macro Market also supports this message with bearish immediate-term price momentum.


For the intermediate-term, I see a 6% risk management range developing between 1.


Short/Sell high within that range, and Cover/Buy low.



Keith R. McCullough
Chief Executive Officer


Short Selling Opportunity: SP500 Levels, Refreshed - 1

Tan Socks

“I ribbed Ben for wearing tan socks with a dark suit.”

-George W. Bush, "Decision Points"


I finished reading President George W. Bush’s “Decision Points” yesterday. He ends his biography with a chapter titled “Financial Crisis” – and I’ll start this morning’s Early Look re-thinking the same.


Newsflash: the most recent “Financial Crisis” that Big Government Interventionists perpetuated before they allegedly came to our rescue is long gone. There’s always a crisis somewhere, and I can guarantee you that we’ll have another one in Global Macro markets as soon as consensus concludes we won’t. The #1 headline on Bloomberg this morning is “All Clear Sounded As Markets Shrug Off Black Swans.”


The long-term crisis that markets and Canadian-American small business owners like me are currently facing isn’t that of 2008. It’s a Crisis of Confidence. Not only in America, but around the world, investors who have embraced both the uncertainty and interconnectedness of Global Macro markets are asking themselves whether or not the so called concept of American style “free-market” capitalism is dead.


Sure, if you socialize enough losses… and pay off enough politicians… in the end, a lot of people will be just fine with this – but a lot of people won’t be. That’s why contempt is brewing in the bellies of conservative Americans who have just about had it with Washington’s centrally planned free lunch.


The storytelling of 2008 is over with. The decision point for 2011 is choosing between the individual liberties embedded in the US Constitution and Big Government’s heavy hand of intervention.


This won’t be easy. American Sacrifice never is. George W. Bush should be commended for being transparent and accountable in admitting that he, like most of us, made plenty of mistakes. In the end, I think he’ll admit that perpetually empowering The Man With The Tan Socks was one too.


In his final chapter, as Bush agonizes through the short-term decision making process as to whether or not the US Government should socialize the system for the sake of the “free-market” system itself (ironic way of looking at it really), he circuitously keeps coming back to his roots: “My friends back home in Midland are going to ask what happened to the free-market guy they knew.” (page 460)


I think that’s a very good question President Bush. One that we need to start answering as a country – and soon. Global Macro markets wait for no one – certainly not this time. Memorializing the Bush Tax Cuts works for me, but not Ben and Hank’s modern day expression of socialism.


Flashback: Ben Bernanke and Hank Paulson – “Their opposing personalities could have produced tension. But Hank and Ben became perfect complements. In hindsight, putting a world class investment banker and an expert on the Great Depression in the nation’s top two economic positions were among the most important decisions of my presidency.” (George W. Bush, “Decision Points”, page 452)


Ok. Well there are more than a few ways I can go at that – but what I really want to do is focus on the future. We don’t need an investment banker and a Great Depression historian running economic policy today, tomorrow, or the day after that. Notwithstanding that the US Federal Reserve isn’t supposed to be tied at the hip to the US Government (politicization) to begin with, we don’t need any of this scary storytelling anymore either.


What we need is a proactive Global Risk Manager at the helm of the highest office of the United States who starts by getting these colluding central planners out of our way. What we need is a Strong US Dollar that isn’t being conflicted and compromised at every whim and turn of our US fiscal and monetary policy. What we need is for someone to stand up and take our free markets back to where they came from.


Back to today’s grind…


This morning what you are seeing in Global Macro markets is a massive tug-of-war between the Keynesian Kingdom begging the US Government for Quantitative Guessing Part III (QG3) and the latest version of America Shrugged (Atlas Shrugged, coming to movie theatres near you on April 15th).




I was on Kudlow last night, and Larry came around to the forecast that I’ve been lobbying him with for the last 6 weeks – Growth Slowing As Inflation Accelerates (Stagflation). This morning you’re seeing more sell-side estimates follow the leader. Consensus estimates for Q1 US GDP Growth have now dropped to 3.35% versus the 3.5-4.5% numbers US stock market bulls were throwing around recklessly a month ago.


As this morphs into consensus, I think the proverbial Battle of the Bulge will be in the US Treasury market where short-term yields (2-year yields in particular, because that’s where The Bernank’s politicization is) can’t make up their mind as to whether or not GROWTH SLOWING gets The Bernank back in the game with QG3 or INFLATION ACCLERATING keeps him in his new geopolitical box.


British attempts to socialize their currency and country seem to have a funny way of being tested and tried before America’s political aristocracy tries the same. In the end, maybe it’s simply because they are older than we are – maybe that just means they get to try to answer President George W. Bush’s question about who the “free-market guys” are first…


The Stagflation Report out of the UK this morning makes the output of former British PM Gordon Brown’s left leaning Keynesian Kingdom policies crystal clear. They pounded the British Pound until they removed Brown from office (he lasted 2 years, 319 days) and now, as a result, on a year-over-year basis the UK inflation rate has risen to +4.4% CPI for February (vs 4.0% January).


Both the Euro (ripping higher) and European stocks (breaking down) are baking in BOE and ECB rate hikes as being for real all of a sudden. That’s how managing Global Macro risk in these interconnected times works – suddenly. And I don’t need a historian in his Tan Socks being advised by America’s crony banking cartel to lead me, my firm, or family through that.


My immediate-term support and resistance levels for WTI crude oil are $97.03 and $103.01 per barrel, respectively. My immediate-term support and resistance levels for the SP500 are now 1277 and 1311, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Early Look

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