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Big Default

“Greece should default, and default big.”

-Mario Blejer


The day after European stock markets put in their 2011 bottom (September 12th), Bloomberg’s Eliana Raszewski and Camila Russo wrote a  Big Headline article titled “Greece Should Default Big To Address Worsening Debt Crisis.”


Notwithstanding this newsy headline being a classic contrarian indicator in its own right (German stocks are up +10% in a straight line since September 12th), Bloomberg was citing a reputable source on the matter. Mario Blejer took over Argentina’s central bank during its epic $95B default in 2002.


Back then, that was considered a Big Default.


Today, what’s another $100, $200, or $800 BILLION dollars? That’s chump change compared to what Madame Lagarde has in mind with what she has dubbed, en englais s’il vous plait, an “infinite amount of resources.” Read: she’s thinking a bazooka 2-3x the size of Hank The Market Tank Paulson’s in 2008. The ECB and IMF central planning for a Euro-TARP is called the EFSF. And it’s Big!


Back to the Global Macro Grind


Whether it’s that September 13thBloomberg headline (the SP500 is up +3.4% since) or yesterday’s “How To Prevent A Depression” article from the venerable Perma-Bull himself, Mr. Nouriel Roubini, we have a lot of Big Government Intervention here on our plate to process. So let’s get cracking.


It takes an aggressive short seller to know one, and I can assure you that plenty of the bears thought yesterday’s selloff in the SP500 into the close was going to be bearish for both Asian markets overnight and the US stock market Futures this morning.


Not happening.



  1. ASIA – Last I checked, it’s a big part of this globally-interconnected earth and ostensibly still has a say in domestic matters that are not related to Europigs or Timmy The Squirrel Hunter Geithner’s latest Keynesian ideas. Both South Korean and Hong Kong unemployment dropped to generationally lows levels last night with August unemployment readings of 3.1% and 3.3%, respectively. On the news, the KOSPI Index (South Korea’s leading indicator for a real-time Global Macro Model like mine) shot back above the 1813 line. What was resistance in Korean stocks is now immediate-term TRADE support.
  2. EUROPE – Qu’est ce qui ce passe avec les higher-lows? (that’s French for why won’t Italy go down on the “news”). What goes down in a raging bear market eventually bounces and could bounce really big if Lagarde pulls out La Bazooka when she speaks in Washington (Fall meetings for the World Bank and IMF) in the next 24-48 hours.
  3. USA – While it’s hard to believe I have not mentioned La Bernank in this note yet (it really is his big Presser day), I think the poor Keynesian is out of bullets. Like his debt-monetizing predecessor of the 1970s, Arthur Burns, he has been neutered by Le Stagflation (0.36%-0.98% Q1/Q2 GDP Growth and 3.8% headline consumer price Inflation) and most likely won’t be able to Twist his way out of it before his career as central-economic-planner-in-chief comes to an end. Pardon le pun. 

Bernanke being in a box (he can’t cut or raise rates anymore) is, on the margin, bullish for Americans. No, not the 10% of us who actually traffic on the long side of the stock market casino. I mean the other 90% of us who really couldn’t give a damn about stocks and would much prefer lower prices for gas, food, college, etc. You know, the non-government manufactured stuff.


Bernanke not being able to do much to debauch America’s Dollar anymore will continue to Deflate The Inflation and put pressure on Gold prices. That’s why I cut our exposure to Commodities in the Hedgeye Asset Allocation Model to ZERO percent again yesterday. While commodity price deflation is very bad for Energy and Basic Material stocks, this is very good for Americans.


As for what a Big Default in Greece today or tomorrow will bring, don’t sweat it. That’s not going to happen. It’s already happened in both their stock and bond markets. We don’t need another big “Blue Chip Economist” who has been wrong on his 2011 GDP forecast by 60-70% to remind us commoners of that.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $85.69-86.93, and 1188-1229, respectively. Don’t let headlines freak you out at the high or low ends of these ranges. Proactively manage your risk around them.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Big Default - Chart of the Day


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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



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