Lower 4Q guidance wasn't surprising, at least to us, but more importantly, management offered some positive visibility into 2012.



"Cruise ticket prices for our peak summer season remained strong close to sailing driving a 2.6% yield improvement (constant dollars). Our North American brands performed well, achieving an almost 6% yield increase, while our European, Australian and Asian brand yields fell 2%(constant dollars) due primarily to the geo-political unrest in the Middle East and North Africa.   Higher revenue yields helped offset a 45% increase in fuel prices, leading to improved quarterly profits....Despite the uncertain economic environment, we have a strong base of business for the first half of 2012, and booking trends during the third quarter have been solid. The increased level of importance consumers are placing on value continues to drive demand for our cruise products."


 -Carnival Corporation & plc Chairman and CEO Micky Arison




  • 3Q2011 results: 
    • EPS: $1.71 (consensus $1.64), excludes $0.02 charge related to sale of Costa Marina
    • Current $ net revenue yields: +7.2% (above consensus of +6.1% and guidance of +5.5% to 6.5%)
    • Constant $ net revenue yields: +2.6% (higher end of guidance +1 to 2%)
    • Gross revenue yields: +6.8%
    • Constant dollar net cruise costs (ex. fuel and sale of Costa Marina): +1.9% (higher-end of guidance +2.5-3.5%)
    • Gross cruise costs: +11.7%
    • Fuel: +45% YoY to $686/metric ton (higher than guidance of $670)
  • 4Q2011 guidance
    • Current dollar net revenue yields: +1.5% to 2.5% (consensus: 5%)
    • Constant dollar net revenue yields: +1% to 2%
    • Current dollar net cruise costs (ex. fuel): -2.5% to 3.5%
    • Constant dollar net cruise costs (ex. fuel): -3% to -4%
    • Fuel: $686/metric ton; 863K metric tons
      • Fuel costs for Q4: $171MM or $0.22 EPS drag
    • EPS: $0.26-0.30 (Consensus: $0.36)
  • FY2011 guidance:
    • Diluted EPS:$2.40-$2.44 ,previously $2.40-2.50
    • Constant dollar net revenue yields: same as previously guided +1.5% to 2.5% 
    • Current dollar net revenue yields: +4%, previously +4-5% 
    • Constant dollar net cruise costs (ex. fuel): +1, previously flat to +1%
    • Fuel: $648/metric ton, previously $639/metric ton 
    • Fuel consumption: 3,400K, previously 3,415K
  • At this time, cumulative advance bookings for the remainder of 2011 and the first half of 2012 are at higher prices with slightly lower occupancies compared to the prior year. Since June, booking volumes for the remainder of the year and the first half of 2012 have run ahead of the prior year at slightly higher prices.



  • 3Q results - 7 cents above consensus - driven by higher net revenue yields and lower costs- each 5 cents - offset by 1 penny impact of fuel prices and currency and 2 cent impact from the sale of Costa Marina
  • Last quarter they slightly overestimated the impact of the ME conflict on the strong summer season and underestimated the impact on the 4th quarter
  • Net yields increased 3% in the quarter 
    • NA ticket yield was up 6% due to higher yields from Alaska, Caribbean and Mexican Riveria. 
    • EAA ticket yield was down 2%
  • Net onboard and other yields increased 2.5%, also impacted by changes in itineraries by MENA which caused less excursions
  • Consumption of fuel declined 4% per berth
  • Weaker dollar benefited results by 10 cents
  • Stock buyback program: in mid-August, we restarted the program and repurchased $445MM of stock since then. Have $443MM remaining on their existing authorization. Buybacks and dividends represent 135% of forecasted FCF in 2011.
  • 1H2012 Outlook:
    • Fleetwide capacity to increase 4.6%
    • Pricing for bookings to date are nicely higher but occupancy is flat YoY
    • NA pricing is stronger as is European pricing
    • Bookings during the last 13 weeks are higher in pricing. In more recent weeks, starting in August, they have seen some fall off in prices due to macro economic issues.
    • Fleetwide bookings during the last 6 weeks weren't as strong as the prior six weeks for the forward 3 quarters, but are still better YoY
    • Value based cruises are doing better
    • 1H12 yields should be up YoY
  • FY 2011 guidance:
    • Currency and Fuel impacted them by 6 cents a share and the loss on sale of Costa Marina by 2 cents a share offset by some better yields and lower costs
  • 3.5% NA, 6% EEA brands increase in 2012 capacity
  • 4Q11:
    • Capacity up 5.8%; 3.2% NA 10% EEA brands - higher pricing and slightly lower occupancies. Still have some European capacity to sell but NA is pretty much sold out
    • NA occupancies at approx same levels as last year, pricing is nicely higher and bookings are trending better
    • EEA brands are 71% vs 41% last year .  Occupancies are lower YoY due to changed itineraries for Med cruises.  Prices are behind YoY.
    • HIgher local currency yields forecasted for the quarter
  • 1Q12:
    • Capacity : 4.9%; 5.7% for EEA brands
    • Occupancies are flat with pricing nicely higher
    • Caribbean pricing is higher YoY with similar pricing, all other itinerary pricing is also higher with similar occupancy
    • All EEA itineraries - pricing is higher at approx the same occupancies.
    • Are forecasting higher net revenue yields
  • 2Q12:
    • Local currency pricing is nicely higher with occupancies running behind last year but it's still early
    • NA: 56% Caribbean - with Caribbean pricing nicely higher with slightly lower occupancies; same for balance of itineraries.
    • EEA brand pricing is higher with slightly lower occupancies
    • General view that consumers are delaying booking decisions resulting in a closer in booking curve


Q & A

  • Late bookings are holding up quite well - so they feel pretty confident on 4Q11 and 1Q12.  They are still nicely ahead on pricing YoY. Have less confidence for 2Q12' since there is less booked and they have started to see the booking curve contract. This time last year, bookings were really strong. They didn't really feel the impact of  until early 2011. The comparisons should get easier in the 2Q.
  • The booking curve has only come in slightly.  It appears to have started to contract in the Spring, after the MENA impact.
  • Europe Med exposure roughly same for 2012 as 2011. They have an ability to react quicker now since they know what they are facing and it will impact a lot less itineraries this time.
  • They are very open about their dividend policy - spoke about a 30-40% payout for regular payout. Are committed to adding 2-3 ships per year. Are committed to returning all FCF above capex to shareholders. 
  • Up means better than 1%, so nicely up means well north of just being up
  • They will remain discipline on the new build activity
  • Ports that they are visiting in 2012 in Middle East and North Africa
    • 9.5% of 2011's itineraries were impacted and they reduced their exposure by 12% - replaced Tunisia with some ports in Italy.  Took out Egypt and replaced with more Greek itineraries.
    • This time they took a fresh approach vs. scrambling to re-route things earlier this year
    • 8.5% in 2012 of itineraries will have ME & North Africa itineraries. Incremental capacity was spread throughout other regions in the world.
  • Have 10 ships on order and the only one that doesn't have financing is the Fascinosa for 2012 delivery. Will have export credits with other 9 ships. Export credits for Italian ships in Italian shipyards are complicated since it's not an export.
  • Discounting for 2012?
    • There are a lot of sales and promotions going on but not really that different from prior years.  Harder for travel agents to make an apples to apples comparison.
  • Fuel cost protection program?
    • They are working on it but haven't started doing anything yet; should occur sometime in the near future
    • Looking at putting together more of a collar - like insurance rather than a true hedge
  • Would they be willing to use their balance to repurchase to shareholders?
    • This year, they had a very attractive opportunity to buy back shares at a higher level than FCF
    • Over the long haul, they prefer not to use the balance sheet to repurchase debt
  • Comfortable with a leverage level that will allow them to keep an A- credit rating. Equates something like 2.0-2.5x leverage.
  • Have they thought about following in the footsteps of the airline industry by reducing capacity and raising pricing.  
    • Newer ships give them much better returns and economies of scale.  Not sure that they will ever get to no capacity or down capacity since they see huge potential to penetrate under penetrated markets.
  • How are things trending for European sourced passengers for summer 2012?
    • It's way too early to comment on next summer.  European booking have clearly seen an impact on last minute bookings, partly because of the change in availability this year over last year.  There was also a lot more available inventory last year given all the last minute itinerary changes.
    • Would like to wait until December to give more color on 2012 than what they already gave and that will still be difficult given that last December, there was no MENA impact. 
    • The only positive is that 2011 had all those last minute itinerary changes and last minute cancellations so the comp is easy
  • Booking very strongly into the Spring and early Summer
  • Don't expect to get all the pricing back from MENA impact in 2012
  • The drop off that they are seeing is nothing like what they saw in 2008.  Can't say that the promotional environment is really any different than last year with the exception of the MENA region
  • Expected that MENA would be a 3% impact on the 3Q and it turned out to be more like 1.5% and expected only a .5% impact in 4Q but it turned out to be a little more than 2%.  Not bad forecasting given that they moved 300 itineraries.
  • Initinerary changes for 2012 in the MENA region were announced on September 1st
  • Hoping that they can offset inflation next year through cost cuts
  • Thoughts on selling older ships?
    • In the last 8 ship sales, they had 4 gains and 4 losses. Net, they had a $45MM gain. 7 of their oldest ships represent just 3% of their total capacity
  • Alaska had a very good year in 2011 and see no reason for weakness in 2012.  Princess is adding a ship in 2012- capacity will increase 11%
  • This was a rough year for China with the earthquake in Japan. However, they are hopeful that they will show nice improvement in 2012.
  • All of their 9 brand managers want to add more capacity. Of the 9 brands, some are meeting their hurdle rates and some are not.  The newest ships are meeting hurdle rates and the older ones are bringing them down. Newer ships are more fuel efficient and have 2x the capacity of older ships.
  • Phasing out brochures for some of their brands has occurred over a number of years. It's less about saving on the brochures and more about moving bookings online. 
  • They are usually 55-75% booked for 2 quarters out. They are in that range for 1Q12' and are at the same level of business on the books as last year.

Squeezy: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU)


So I’m like a Perma-Bull now, right? All I do is buy-the-dips.


From a quantitative setup perspective, not a lot has changed day-over-day other than our getting opportunities to get longer (on a net basis) by covering shorts and patiently buying longs. Italy being a mess and US Housing Double Dipping are calls we’ve been making for over a year.


This morning I moved the Hedgeye Portfolio to 14 LONGS and 7 SHORTS (right back to where I was last Thursday morning). Most of the big levels that matter are similar. Fear (VIX) is being sold more aggressively now. That inverse relationship to US Equities needs to be respected.


Updated risk management lines across durations: 

  1. SELL TAIL = 1266
  2. SELL TRADE = 1231
  3. BUY TRADE = 1189 

So if you get another chance to cover shorts at higher-lows, do that. Then sell at the top of this proactively predictable range (1231).


Squeezy The Shark is hungry.



Keith R. McCullough
Chief Executive Officer


Squeezy: SP500 Levels, Refreshed - SPX


Notable macro data points, news items, and price action pertaining to the restaurant space.






QSR stocks outperformed yesterday as CMG and SBUX moved higher.  Dean Foods dragged the food stock average performance down.


THE HBM: MCD, SBUX, THI, KONA - subsector fbr





MCD was added to the “Fresh Money Ideas” list at Lazard.


SBUX is giving away free iBook downloads in partnership with Apple’s iTunes.  The downloads are available via in-store Wi-Fi hotspots.


THI recently opened its first store in Dubai, according to management commentary at the Scotia Back to School conference. 





KONA was raised to a “Strong Buy” at Feltl.  The price target is $8 per share.


THE HBM: MCD, SBUX, THI, KONA - stocks 920



Howard Penney

Managing Director


Rory Green



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 80.46%
  • SHORT SIGNALS 78.35%


TODAY’S S&P 500 SET-UP - September 20, 2011

As we look at today’s set up for the S&P 500, the range is 41 points or -1.42% downside to 1187 and 1.99% upside to 1228.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: -1647 (+53) 
  • VOLUME: NYSE 908.4 (-49.9%)
  • VIX:  32.73 +5.7% YTD PERFORMANCE: +84.39%
  • SPX PUT/CALL RATIO: 2.73 from 1.87 (+46%)



  • TED SPREAD: 35.25
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.98 from 1.95
  • YIELD CURVE: 1.82 from 1.80


MACRO DATA POINTS (Bloomberg Estimates):

  • FOMC begins 2-day rates meeting, decision tomorrow
  • 8:30 a.m.: Housing starts, est. 590k (-2.3% M/m), prior 604k
  • 8:30 a.m.: Building permits, est. 590k (-1.8% M/m), prior 597k
  • 8:55 a.m.: Redbook weekly sales
  • 11:30 a.m.: U.S. to sell $30b 4-wk, $25b 52-wk bills
  • 4:30 p.m.: API inventories 



  • Greece will hold another call with its main creditors today after a “productive’’ round of talks yesterday aimed at staving off default
  • Express Scripts to tell Congress in subcommittee hearing its $29.1b bid for Medco would reduce drug costs, preserve “highly competitive” marketplace
  • IATA raises its 2011 forecast for global airline profits by 73%
  • Eight offshore banks are under federal grand jury investigation for facilitating tax evasion by U.S. citizens
  • AT&T was sued by Cellular South in an effort to block T- Mobile acquisition
  • Italy debt rating cut by S&P to A on weaker growth outlook; two-year Treasury drops to record low
  • UBS board to meet in Singapore this week following disclosure of $2.3b loss from unauthorized trading: 2 people with knowledge of situation
  • U.S. said to be probing trades made before S&P cut U.S. rating in August, WSJ says
  • FDA briefing docs due for Sept. 22 advisory panel on New York Blood Center’s umbilical cord blood BLA
  • Tyco units may attract interest from UTX, Honeywell, Johnson Controls: Bernstein
  • GM-UAW contract presented to union locals



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Cattle Seen at Record $1.36 a Pound After Cull: Commodities
  • Oil Rises on Equity Markets’ Advance, Speculation of Supply Risk
  • Copper Rises From Nine-Month Low as Rio Sticks to Demand Outlook
  • Teekay Profit Booms on LNG Shipping Demand: Freight Markets
  • Gold to Top $2,000 This Year on ‘Confidence Crisis,’ Survey Says
  • Corn, Soybeans Advance as Adverse U.S. Weather May Hurt Crops
  • Coffee Climbs on Speculation La Nina May Hurt Crops; Cocoa Rises
  • Fertilizer Safer Than Gold to Uralkali’s Lenders: Russia Credit
  • Qaddafi Wheat Cargo Helped Sustain Libyan Rebellion’s Stronghold
  • Australia Cuts Commodity Sales Outlook 1.6% on Lower Prices
  • Food-Inflation Concerns Will Persist, FAO’s Abbassian Says
  • Sugar Output in India Seen at Four-Year High as Planting Gains
  • Chevron Victory Blocking $18 Billion Verdict Thrown Out in U.S.
  • Egypt to Boost Wheat Imports to Avert Unrest, El Attal Says
  • Gold Gains in London as European Debt Concern Spurs Demand
  • Australia Increases Sugar-Output Estimate as Crop Recovers
  • Oil Stockpiles Fall to Eight-Month Low in Survey: Energy Markets




THE HEDGEYE DAILY OUTLOOK - daily currency view





THE HEDGEYE DAILY OUTLOOK - euro performance





THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director



Being the Critic

This note was originally published at 8am on September 15, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The critic has to educate the public; the artist has to educate the critic.”

-Oscar Wilde


Life is short.  So short, in fact, that we should all try to find time to do things that we enjoy and derive some amount of satisfaction from doing them.  I’ll be honest, I think most Hedgeyes enjoy what they do every day.  As for other financial firms, I’m not so sure.


According to reports this morning, UBS lost roughly $2 billion from “unauthorized trading by a trader in its Investment Bank”.  Not to name names, but if you work at a certain investment bank this morning, that kind of sucks.


So, here’s the bottom line, Hedgeye is hiring. What are we looking for? Well, quite simply, people that have a passion for doing great research.  No, we aren’t going to offer anyone a super duper 3 by 10 guaranteed bonus, but if you do love what do and think your research is differentiated, well, then email me :  Keith calls me Big Alberta and I’m more commonly known as the Director of Research at Hedgeye.


Back to the global macro grind. . .


Far be it for the lads at Hedgeye to be contrarian, but, are you sitting down, the SP500 is currently giving us a bullish immediate-term TRADE signal.  Not only that, but 7 of 9 S&P sectors are giving us the same quantitative signal.  Aye carumba ! Are the Hedgeye lads getting all bulled up? Well, at least for a trade. . .


Currently, the only two sectors that remain bearish on our TRADE duration are Financials (XLF) and Industrials (XLI).  In the Virtual Portfolio, we are long Utilities (XLU) and short Industrials (XLI).  Not only has this worked in the year-to-date with Industrials down -10.1% and Financials and Utilities up 7.0%, but we think it will continue to work.


It has been an interesting few weeks for us at Hedgeye.   In dramatic fashion, we have seen many of the largest sell side economists capitulate to our view on the economy and growth.  For those of our subscribers that read us somewhat regularly, they know being bearish is not new to Hedgeye.  In fact, by way of a time stamp, attached is an article that I wrote for Fortune on December 31st, 2010:


If you don’t have time to read it, I will highlight one quote, which is as follows:


“Currently, according to a Bloomberg survey of the strategists from 11 of the largest brokerage firms in the United States, the mean consensus target for the S&P 500 by year end 2011 is roughly 10% above current levels. Further, every single strategist is expecting a positive performance out of the index in 2011.”


As my 9-year old niece might say, OMG ! Indeed, it is somewhat scary to think that the reputed smartest economists on the street got the target for the most relevant stock market in the world so wrong. 


Yesterday CNBC hosted its Seeking Alpha Conference, which on some level was entertaining to watch.  Actually, it was entertaining on many levels. The most interesting excerpt was from Leon Cooperman who, and I’m paraphrasing, indicated that he recently had lunch with his top friends in money management and they are all under allocated to U.S. equities.  Now, obviously, Mr. Cooperman isn’t always right, but he has been around the block and his statement yesterday was insightful.  Incidentally, and not that we planned this, our current weighting to global equities is currently 24%, which is our highest allocation since early July . . . aye carumba, indeed !


In the longer term, we are not so bullish. In fact, in the Chart of the Day today, we highlight the long term interest rates of Japan.  Or as our Asian Analyst and former Yale lineman Darius Dale likes to characterize it : ZIRP.   For those of you that don’t know what ZIRP means, it stands for Zero Interest Rate Policy.  In the chart, Darius has outlined the dangers of ZIRP.


While conventional wisdom would have you believe that ZIRP means that equities are cheap on a relative basis, the history of Japan actually suggests otherwise. ZIRP was instituted in Japan in 1999 and the Nikkei has returned -37.4% since the start of that year. So while risk assets, like equities, look cheap vis-à-vis interest rates, it all depends on the assumed economic growth rate implied by interest rates.


On a totally non-linear note, I would like to end with a quote from a book that Keith is currently reading called “Gates of Fire”.  As Keith emailed the team late last night:


“There’s an excerpt in Gates of Fire where the Spartan officer, Dienekes, was told (on the eve of battle) that the Persian archers were so many in number that when they fired their volleys, the mass of arrows would block out the sun.

Dienekes looked at the messenger and said …


“Good. Then we will have our battle in the shade.””


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Being the Critic - Chart of the Day


Being the Critic - Virtual Portfolio

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