European Risk Monitor: Breath Holding Ahead of Greek Confidence Vote

Positions in Europe: Long Germany (EWG); Short Spain (EWP)


All eyes and ears are waiting for Greece’s confidence vote on PM Papandreou’s current government, scheduled to be announced by midnight local time, or 5pm EST tonight.


An expert on the Greek political state recently stated on a JPMorgan conference call that the probability that Papandreou’s leading PASOK party wins the confidence vote is around 75%. We think the number is realistic and expect, despite a few PASOK party dissenters in recent weeks, parliamentary heads to vote along the party line to secure their jobs.


Concerns over party defection should be put in context. Over the last 10 days 2 PASOK deputies resigned, meaning their seats were turned over to new PASOK members, and two members defected, meaning they refuse to vote for the party but don’t give up their seats. Currently PASOK has 155 seats in the 300 seat chamber, or a majority of 5 seats. While the party had as much as a 10 seat majority in 2009, history has shown that a party can rule with as little as a 1 seat majority.


The main opposition party, New Democracy (under the leadership of Antonis Samaras), currently polls around 30% approval, or around 10% higher than PASOK if elections were held today, awaits tonight’s vote. Commentators criticize New Democracy’s anti-austerity position and lean to renegotiate bailout terms with troika (ECB, IMF, EU) as short-sided and unrealistic for their positions are squarely against troika’s mandate that bailout monies will only be provided if the €78 billion austerity package [€28Bill in spending cuts and tax hikes and €50 billion sale of private assets by 2015] is passed. 


Risk, as reflected by Greek sovereign CDS spreads and bond yields, has come in over recent days reflecting the likelihood that Papandreou wins the confidence vote tonight and Greece receives future bailout funds (see chart below).  That said, risk in Ireland and Portugal continue to trend higher, and indicate once again that fiscal imbalances across the periphery are far from rear-view (see second chart below).  


European Risk Monitor: Breath Holding Ahead of Greek Confidence Vote - b. risky


European Risk Monitor: Breath Holding Ahead of Greek Confidence Vote - b. risk2


We expect to see EUR-USD support around $1.42 and trade up to $1.44 over the immediate term, bouncing on headline news, but ultimately finding support as big brother Troika steps in to aid Greece over the intermediate term.



Greece’s Timeline

If Papandreou wins the Confidence vote tonight, here’s a timeline of important events over the next weeks to keep ahead of:


Thursday, June 23-Fri June 24 – Summit of EU leaders to assess the 18-month-long debt crisis.


Thursday, June 30 – Greece votes on a €78 billion austerity package, the passing of which is a precondition, as defined by the European finance ministers, to get its next quarterly (€12 Bill.) installment of bailout money from Troika in July.


July 3 – Eurozone Finance Ministers meet.  Assuming the Greek parliament votes to pass the austerity/privatization measures, the next tranche of IMF money would be formally released following this Jul 3 gathering. 


July 11 – European Finance Ministers meeting.



Banks Indicate Risk


As is typical for our weekly European Risk Monitor, our European Financials CDS Monitor shows that bank swaps in Europe were wider last week, week-over-week.  35 of the 38 swaps were wider and only 3 tightened. The move is in line with the rising risk premium to own the perilous financial state of the periphery.


European Risk Monitor: Breath Holding Ahead of Greek Confidence Vote - b. risk 3



We do not currently see the weakness in Greek capital markets as a buying opportunity. For reference, Greek equities are down -27% since a high in February, and finished 2010 down -36%. We’d get short Spain or Italy at the right price. We’re currently short Spain via the etf EWP in the Hedgeye Virtual Portfolio.  We remain long Germany (EWG), despite a more cautious view given slowing high frequency data points over the last months, the newest data including ZEW’s 6-month forward looking economic sentiment survey that plunged to -9 in June versus 3.1 in May.


Matthew Hedrick



Solid pricing.  Better than expected guidance.



"Our North America brands' revenue yields increased 3 percent in the second quarter while yields for our Europe, Australia and Asia brands were up slightly (constant dollars), having been affected by the geo-political events which unfolded in the Middle East and North Africa, as well as the earthquake and nuclear disaster in Japan.  The revenue yield improvement was more than offset by higher fuel prices which cost the company approximately $150 million, or $0.19 per share. Our North America brands continue to perform well, benefiting from the gradual economic recovery, with strong yield growth expected in the second half of the year. We expect lower yields for our Europe, Australia and Asia segment in the second half of 2011 as a result of the significant deployment changes in Europe. Despite the considerable challenges we have faced this year, the long-term fundamentals of our business remain sound."


-Carnival CEO Micky Arison




  • 2Q2011 results:
    • EPS: $0.26 (consensus $0.22)
    • Current $ net revenue yields: +6% (above guidance of +4.5% to 5.5%)
    • Constant $ net revenue yields: +2.3% (higher end of guidance +1.5-2.5%)
    • Gross revenue yields: +5.8%
    • Constant dollar net cruise costs (ex. fuel): +2.7% (higher-end of guidance +2-3%)
    • Gross cruise costs: +10.3%
    • Fuel: +35% YoY to $673/metric ton (higher than guidance of $659), costing $0.19 in EPS
  • 3Q2011 guidance
    • Constant dollar net revenue yields: +1% to 2% (+5.5% to 6.5% on current dollar basis vs guidance of 5.9%)
    • Constant dollar net cruise costs (ex. fuel): +2.5-3.5% (+7.0% to 8.0% on current dollar basis)
    • Fuel: $670/metric ton; 860K metric tons
      • Fuel costs for Q2: $170MM or $0.21 EPS drag
    • EPS: $1.60-1.64 (Consensus: $1.74)
  • FY2011 guidance:
    • Reiterates implied guidance on June 13
      • Diluted EPS: $2.40-2.50
      • Constant dollar net revenue yields: +1.5% to 2.5% 
      • Previously announced, 15 cent (1% yield) adverse geopolitical impact from previous guidance (already includes the 5 cent cost benefit (fuel/FX) from Q2)
    • Current dollar net revenue yields: +4-5% (lower than guidance of +4.5 to 5.5%)
    • Constant dollar net cruise costs (ex. fuel): flat to +1% (unchanged from guidance)
    • Fuel: $639/metric ton (higher than guidance of $631/metric ton)
    • Fuel consumption: 3,415K (lower than guidance of 3,440K)


  • 4 cent 2Q EPS beat: 2 cents from net revenue yields, 2 cents from misc. non-operating items
  • 2Q Capacity: +5%;
    • EAA brands up 9%; NA brand up 3%
  • 2Q Net yields: similar increases in net ticket and net onboard/other revenues
    • NA ticket yield: +3%
    • 2Q: flat Caribbean itineraries
      • On track with easing of pricing pressure as 2011 progresses
    • All other itineraries up except Europe (impacted by ME unrest)
    • EA ticket yield: +1%
      • Itineraries outside of Europe were higher
    • Net onboard and other yields:+2%
      • Driven by NA brands as EAA brands impacted by MENA itinerary changes
  • Net Cruise costs: saw inflation in food costs, travel, and rooms.
  • 10% change in price of fuel for rest of 2011 represents a $0.14 EPS impact
  • 10% change in FX for the rest of 2011 represents a $0.16 EPS impact
  • 2Q more challenging than expected, esp. European brands
  • Fleet-wide reduction will cost $0.20: $0.17 per share related to MENA, ~$0.02 NA brand reduced pricing, $0.01 for Japan
  • Significant increase in Mediterranean capacity was a factor in lower pricing
  • UK: recently, consumer confidence has rebounded and sees stables booking patterns 
  • 2H 2011
    • Fleet-wide pricing higher YoY (more higher in NA than EAA)
    • Occupancies are lower
      • Slightly lower for NA; lower for EAA
    • Looking at trailing 6-wk bookings show improvement
  • NA brands continue to perform well despite slower growth in US economy; this bodes well for 2012 bookings.
  • 3Q 2011
    • +4.8% capacity (NA: +3.3%, EAA: +7.2%)
    • Occu. a little lower
    • Local pricing nicely ahead YoY, despite Europe
    • NA brands: 36% in Caribbean, down YoY; 25% in Europe (17% last year); 23% all others (unchanged YoY)
    • NA pricing: "well ahead of last year"
      • Alaska pricing: higher YoY
      • Caribbean pricing: a little higher
      • Europe pricing: lower
      • Trailing 6-wk NA Booking volumes: "very little inventory left"
    • EAA brands: 83% in Europe
    • EAA pricing: slightly ahead
    • EAA occ: lower
    • Trailing 6-wk EAA booking: strong, with lower prices
  • 4Q 2011
    • +5.8% capacity (NA: +3.2%, EAA: +10%)
    • Pricing nicely higher
    • Occu: lower-- slighty lower for NA, lower for EAA
    • NA brands: 42% in Caribbean down from 50%; 14% in Europe vs 9% last year; 10% in Pacific (unchanged from last year)
      • NA Bookings strong
    • EAA brands: 71% in Europe vs. 64% last year
      • Pricing higher
      • Lower occu
      • Expect EAA pricing to continue to decline 
      • Bookings should pick up
  • 1Q 2012
    • +5.5% capacity (NA: +4.5%, EAA: +7.2%)
    • Pricing higher, occu slightly lower
    • Bookings encouraging
    • NA brands: 65% in Caribbean (unchanged YoY)
      • Caribbean pricing nicely higher with slightly lower occu
      • pricing for all others higher at slightly lower occu.
    • EAA brands: 22% in Caribbean; 20% Europe (23% last year); 18% in South America (16% last year)
    • EAA pricing slightly higher at slightly lower occupancies


  • No visibility for summer 2012, which is normal around this time
  • 2012 NA capacity : +3.5% ; EAA: +8%; 
  • 2012 NA industry capacity: +3%; EAA: +6%
  • Not sure about Greece but hasn't been a significant problem yet
    • 8-9% of capacity in Greece in 2H 2011
    • Seabourn has major presence in Athens
    • Most of Greek islands not impacted
  • Relatively more exposure to MENA in Q4 but have already guided yields lower;
  • Conservative on Q4 outlook
  • Historically when Europe weakens, Alaska does well as an alternative destination
  • Thinks people who canceled MENA bookings went to book other itineraries at lower prices
  • The Q2,Q3,Q4 itinerary changes "have settled down"
  • Q2 five cent cost savings: improvement in fuel efficiency, nonoperating items
  • Onboard spending guidance: expected nomralized basis (up 2% for 2011); relatively stable
    • Up across all categories except casinos; nothing changed since previous guidance
  • Non-operating items:
    • Ships lease benefits
    • FX gains
    • May pick up another cent or two next year
  • No impact from Chilean volcano for Australia and New Zealand Cruises
  • Europe Q2 and beyond repositionings: nothing changed for MENA right now but will change if needed
  • Stopped calling in Israel in Q2 but will restart in the fall
  • No update on fuel hedging
  • Had a significant cost in 4Q 2010 due to fire on Carnival Splendor
  • Going forward on costs: 1/2 of inflation; long-term goal: 0-0.5 of inflation
  • Northern Europe doing well
  • UK brand capacity down slightly
  • Customer deposits: +$400MM (May to May), # has currency benefits
  • Will stop some calls in Tunisia
  • No change in dividend/repurchase decisions
  • Mexico situation--Princess pulling out--seems to be okay
  • "If you price fuel where it is today and we're off to a good start in 2012"
  • NA: premium, luxury Cruises and contemporary all strong 
  • Egypt elections in September could impact Europe redeployment decisions

Squeezy: SP500 Levels, Refreshed

POSITION: no position in SPY


No position. Waiting. Watching.


After selling my long US Dollar position (UUP) and covering my only remaining S&P Sector Short (XLB) late last week, that’s what I have been doing.  Sometimes you just need to let Squeezy The Shark strap on the old feedbag and rally to lower-highs.


No matter where we go this morning here, are the refreshed risk management lines that matter across Hedgeye’s durations: 

  1. Intermediate-term TREND resistance = 1320
  2. Immediate-term TRADE resistance = 1294
  3. Immediate-term TRADE support = 1259 

There’s no need to get whipped around by this. The market is behaving within rational boundaries of what we’d consider probable. Just be patient and prepared to start selling more aggressively again on the way up.


Hedgeye is 17 for 18 in June on closed positions (longs and shorts). We’re in no rush to do anything until hands look forced. We’re getting there.



Keith R. McCullough
Chief Executive Officer


Squeezy: SP500 Levels, Refreshed - 1

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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.


Notable news items and price action from the restaurant space as well as our fundamental view on select names.





“Deflating the Inflation” - U.S. wheat futures closed at a six-and-a-half-month low Monday as the advancing harvest increased inventories of the grain.


With corn planting now complete, 97% of corn in the top 18 producing states has emerged according to the USDA’s latest Crop Progress report released June 20.  70% of crops were in “good” to “excellent” condition, compared to 69% last week and 75% last year.




  • MCD UK say the introduction of Wraps  is the biggest introduction to its permanent menu in four years and says it has made more changes to its menu in four years than in the previous 30. The range includes a Grilled Chicken Salad Wrap and a Sweet Chilli Crispy Chicken Wrap, and has been packaged to make them easy to eat on the move. McDonald’s is also running a wrap of the day promotion offering one wrap at £1.99.

Hedgeye: Globally, MCD continues to try to build sales around the shoulder periods of lunch. 




  • BWLD - Buffalo Wild Wings has pledged that if the players and owners compromise on their differences and come to an agreement to return to the field by July 20 - the first day players are scheduled to report to training camp - everyone who signs the "Save Our Season" petition will be awarded six free wings to be redeemed when the return of professional football is celebrated in September. 

Hedgeye:  I like this promotion, but it also tells you that sales trends without football are not going to be good. 


  • DRI - Interesting call out of Wells Fargo; Darden Restaurants estimates increased.  “Firm cites the new Seafood Feast promotion at Red Lobster and raises FQ1 and F12 estimates.”  As I wrote a few weeks back, the $15 price point at RL is an “extreme” discounting for that brand. 

Hedgeye: I know the SSS have accelerated, but the question remains about consumer preference for the promotion, especially given the double digit inflation the company is experiencing in seafood.


  • CBRL: Right when the company faces pressure from an activist investor CBRL names Coleman Peterson, apparently known as “America’s Top People Person,” to their Board of Directors. Previous executive experience includes time as the chief human resources officer for Wal-Mart Stores, Inc. 

Hedgeye: Maybe an indication the Mr. Woodhouse is just ignoring the thorn in his side.


  • DIN plans to expand IHOP to the Middle East.


  • TXRH gained on accelerating volume while PFCB and RUTH declined on accelerating volume. 




Howard Penney

Managing Director


TODAY’S S&P 500 SET-UP - June 21, 2011


The USD down = Commodity and Stocks up, but lower-highs on low volume across the board.  Is the USD is back down for the week-to-date because:


A) Bernanke has his US Dollar Devaluation Presser in the next 48hrs?

B) Eurocrats are finding a way to hold $1.42 EURO/USD support?


We will get more bullish on Global Equities (China in particular) if the USD strengthens and we Deflate The Inflation - not the other way around.  As we look at today’s set up for the S&P 500, the range is 32 points or -1.51% downside to 1259 and 0.99% upside to 1291.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +1069 (+296)  
  • VOLUME: NYSE 786.44 (-50.99%)
  • VIX:  19.99 -8.51% YTD PERFORMANCE: +12.62%
  • SPX PUT/CALL RATIO: 1.65 from 2.03 (-18.51%)



  • TED SPREAD: 22.12
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.97 from 2.94
  • YIELD CURVE: 2.59 from 2.56 



  • 7:45 a.m./8:55 a.m.: ICSC Retail/Redbook Retail
  • 10 a.m.: Existing home sales, est. 4.8m (-5.5% M/m)
  • 11:30 a.m.: U.S. to sell $58b in 4-wk bills
  • 4:30 p.m.: API inventories


  • Germany June ZEW economic sentiment (9.0) vs consensus (2.0) and prior +3.1;Germany June ZEW current conditions 87.6 vs consensus 89.5 and prior 91.5
  • Greek Prime Minister George Papandreou faces a confidence vote in his government
  • Jon Huntsman to announce he’s running for president
  • Spain Sells 2.4b Euros of 6-Month Bills - Avg 6-mo. yield 1.776% vs 1.766% at May auction.




THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Copper Imports by China Slump 47% as Consumers Prefer to Drain Stockpiles
  • Oil Gains a Second Day as Euro Crisis Eases, U.S. Crude Supplies Seen Down
  • Copper Rises From One-Week Low on Reduced Concern About Greek Debt Default
  • Pork Prices in China Seen Staying at Highs as Domestic Shortage Persists
  • Raw Sugar Falls on Forecast for Increased Thai Production; Cocoa Advances
  • Corn Gains After Slump as Flooding Threatens China Crop Amid Rising Demand
  • Gold May Advance as Weaker Dollar, Greek Debt-Default Concern Spur Demand
  • Qaddafi Tanks Deprived of Diesel as Ships Shunning Libya: Freight Markets
  • Australia Keeps Sugar Forecast as Cyclone Damage Offsets Increased Acreage
  • Russia Fails to Win Back Egypt, World’s Biggest Wheat Buyer, After Halt
  • Rubber in Tokyo Declines to One-Month Low on Concern Demand Remains Slow
  • Rubber Production in India Jumping 22% as Car Sales Fuel Demand for Tires
  • Crude Supplies Fall in Survey as Gasoline Output Increases: Energy Markets
  • China’s Rare Earth Quotas May Limit Supply to Japan, Europe, Lifton Says




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: green across the board, but on low-volume to lower-highs; DAX back above my 7139 TREND line; Spain and Greece below TREND lines
  • S&P reaffirms view it would likely treat voluntary debt restructuring for Greece as a default, Moritz Kraemer, head of European sovereign ratings tells Die Welt

THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: green across the board, with China (which we just bought) up +1% and India finally stopped making lower-lows, +0.33%.

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

Boston Harbor Smiles

This note was originally published at 8am on June 16, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I'm just ready to move forward.”

-Tim Thomas


After watching a generational win for the Boston Bruins last night in Game 7 of the playoffs, I am sitting here in my hotel room watching a gorgeous sunrise in the Boston Harbor. It must be Lord Stanley’s way of smiling.


Was I smiling yesterday? Am I smiling this morning? Big time. We love winning here at Hedgeye. And we support anyone who has a transparent, accountable, and winning attitude. Our vision for American Optimism is as old as America itself.


Yesterday’s price action in markets did nothing but solidify our conviction in our Global Macro Themes:

  1. Growth Slowing (bearish on Wall Street/Washington US GDP Growth estimates) 
  2. Deflating The Inflation (bearish on housing, stocks, and commodities)
  3. Indefinitely Dovish (bullish on long-term Treasuries, UST Flattener, and Gold – TLT, FLAT, and GLD)

We’re not celebrating the other team’s losses - someone always has to lose (Goldman is bullish on commodities; JP Morgan is bullish on Equities, etc). We are championing a winning Risk Management Process that’s saving our clients from losing money in 2011.


Winning starts with not losing. It’s pretty difficult to lose if you don’t get scored on. Swedish offensive skills of the Sedin Sisters last night aside, defense won The Stanley Cup. Bruins goalie Tim Thomas was as focused as any professional athlete I have seen in a long time.


Focus, discipline, confidence – you either have it, or you don’t.


I certainly don’t have it all of the time. But the challenge isn’t to overcome my emotional capacity. The goal is to build a team and process that can pick me up when I am down. And Lord Stanley knows I’ve had my fair share of downs in life.


“I’m just ready to move forward.”


Yesterday’s wins are over with. Today we have to deal with today. It’s time to play the game that’s in front of us.


From a risk management process perspective, before we move forward, we always look back. We need to absorb what’s been priced into market expectations so that we can handicap what the probabilities are for prices to change.


From an immediate-term TRADE perspective, oversold lines in Global Equities are now as follows:

  1. SP500 = 1261
  2. Nadaq = 2613
  3. Russell2000 = 771
  4. Japan’s Nikkei = 9367
  5. China’s Shanghai Composite = 2661
  6. India’s Sensex = 18,066
  7. UK’s FTSE = 5662
  8. Germany’s DAX = 7011
  9. Spain’s IBEX = 9811
  10. Brazil’s Bovespa = 61,109

From an immediate-term TRADE perspective, oversold lines in Commodities are:

  1. WTIC Oil = $94.70
  2. Copper = $4.07
  3. Gold = $1520

From an immediate-term TRADE perspective, oversold line in US Treasury Yields are:

  1. 2-year UST Yield = 0.36%
  2. 10-year UST Yield = 2.91%
  3. 30-year UST Yield = 4.15%

The corollary to oversold bond yields, of course, is overbought bond prices – so, while it’s popular for US stock market centric pundits to trash anyone who isn’t Perma-Bullish on “stocks for the long run”, we’re quite happy that they wake up every morning thinking that way. There’s always risk to be managed somewhere. Being bullish on bonds yesterday was a big win.


There are winners and whiners in this profession. We subscribe to the principles of the former. Being Perma-Anything generally doesn’t work. In the last few years I have written a few Early Look notes about Bears and Bruins:

  1. Bullish Bruins” = April 17, 2009  (when we went bullish on US Equities – bought SBUX April 21, 2009)
  2. Ragingly Bullish Bears” = May 5, 2011 (when we pressed the short case for Growth Slowing)

What’s interesting about the timing of the “Ragingly Bullish Bear” note is how quickly sentiment has changed. In that May 5, 2011 missive I highlighted the following sentiment setup in the II Bullish-to-Bearish survey:

  1. Bulls up 100 basis points week-over-week to 55%
  2. Bears down 200 basis week-over-week to 16.5%
  3. The Spread (Bulls minus Bears) widened by 150 basis points week-over-week to +38.2% for the Bulls

Again, relative to itself, there are a few critical risk management callouts in this long-dated survey to consider:

  1. Bulls are not ragingly bullish
  2. Bears are not allowed to be bearish
  3. The Spread between Bulls and Bears is only 200-300 basis points from its all-time wides (all-time is a long time)

“All-time “wides” is risk management locker-room speak at Hedgeye for something you don’t want to mess with – kind of like being a man dressed in orange last night drinking a smoothie with your i-pod on in the bowl of the Boston Garden – it’s just a bad position to be long of.”


Back to today…


The only worse position to be “long of” was probably a Blue/Green Canucks jersey at a bar in Boston last night. This morning, the good news for Perma-Bulls (US stocks) is that this morning the II Bullish-to-Bearish Spread has narrowed to +11% for the Bulls (37% of people now admit to being Bullish and 26% being Bearish).


That’s a huge narrowing of an exceptionally wide spread. But my and the Boston Harbor’s Smiles are still beaming.

My immediate-term support and resistance ranges for the Gold, Oil, and the SP500 are now $1520-1554, $94.70-99.58, and 1261-1281, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Boston Harbor Smiles - Chart of the Day


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