Things are bad – everyone knows it. There’s less visibility in the business with closer in bookings and therefore higher need to discount. Fuel is a huge tailwind although FX is a bit of a headwind. At the end of the day, CCL will still do over $2.00 a share and is trading at only 10-12x EPS. The stock is cheap and it should be. It seems like the delta on fuel could be negative. More importantly, supply growth is significant over the next few years. Cost of capital and supply are going up, ROI is coming down, and the credit markets present risk.

Here are our notes from the conference call. Think of it as a transcript with synthesis.


- Fuel and FX act as somewhat of a hedge for each other
- Europe is holding up much better than US, which on the surface is positive because that’s where most of the capacity additions have occurred. However, the delta in Europe could be greater than North America. Research Edge maintains its negative European macro view
- Reduced Local Currency yields to -10% (from -6%) partially due to end of fuel supplement
- Booking patterns are closer in, trade down to value with shorter duration “value” Caribbean trips from exotic and longer ones. Because booking patterns are closer in its also affecting yields.

- Company suspended dividend – saving $1.3BN
- Operating cash flow: $3.3BN
- Committed financing for ship delivery: 800MM
- Capex: $300-400MM
- Debt maturities: $700MM
- Are working new bank financing, have 1.3BN available on their credit line.

2009 booking patterns:

1Q09: Fleetwide capacity up 2.6% (1.9% in NA, 7% in Europe)
- Occupancy and pricing behind next year
- NA brands – 62% capacity in Carib, 12% in Mexico (Pricing slightly ahead and occupancy slightly behind for these two) while longer term and exotic running behind on both
- Europe Brands are running behind in occupancy and pricing, but Costa is running ahead.
- Estimated local currency yields to be 5-10% lower than 1Q08
- Forecasting 20-22 cents per share (vs 30 cents in 08)

- Fleetwide capacity up 4.4%
- Pricing and occupancy running behind
- Think that booking pace will improve in the back half
- Europe brand pricing is a slightly higher with lower occupancies.

- Overall occupancy and pricing significantly behind last year’s levels – evidencing that the US consumer is deferring vacation decisions
- Shaping up to be challenging – but expect the picture to improve given the closer in booking patterns.

Room to cut costs?
- Working to create more synergies and saving throughout the org. Think they can get back to 0% cost metric on a ABDL basis.
- Some improvement in booking post election but on lower yields. People not being able to get credit is affecting their business.

- Post 9/11 there were a bunch of bankruptcies – so that may present an opportunity. Basically put – if CCL is having difficulty getting credit – everyone else is in a much worse position

General Comments:
- Bookings in 4Q08 better than expected – indication more of how conservative they were – not saying that there was any strength
- Volumes in Q109 are strong because the pricing has come in
- Export credits: Basically the government guarantees a piece of the loans
- Have 17 ships on order, have 3 export credits, have commitments for 3 more ships, 2 of the 3 will be signed in the next 2 weeks, last one in 30-60 days. But 5 of the ships are being built in Italy for an Italian flag so they don’t need any credits
- Italy, Germany & France performing the best in Europe, Spain is still a challenge, and UK which is performing worse than continental Europe. US seems to be performing the worse.
- Capacity growth beyond 2012 – (4% already) unlikely to do any more for that year. Still have time to order ships for 2012 if conditions improve.
- They have seen increases in cancellations across all brands. As the booking curve moves they also get less deposits and interest on deposits.

Will they cut costs:
- consolidate their multiple headquarters or cut sales commissions – will absolutely not cut their distribution in tough times… and will not consolidate since they have multiple brands
- They are working more on data center consolidation and sharing sourcing across brands- some of it is baked in and some not, 1% with fuel is 65MM and without 55MM

Can they delay deliveries or asked to?
- No they have not. Can mitigate capacity additions without delivery cancellation by moving inventory and selling older ships. Would rather take an old ship out of service than cancel a new ship

Obamerica: Schapiro to head the SEC

President Elect Obama selected Mary Schapiro as his choice to run the Securities and Exchange Commission. We view this choice positively because she is experienced, she will likely have bipartisan support, and she has been a pro business reformer in prior regulatory roles.

Internally, we’ve been debating whether he should have selected a more activist type personality, as FDR did with his selection of Joe Kennedy in 1935 or as President Bush did with Bill Donaldson (a former Yale Hockey Player) in 2003, but on the margin she is certainly an improvement over the SEC’s current leadership.

Schapiro is currently the CEO of the Financial Industry Regulatory Authority (FINRA), which is the largest non-governmental regulator for all securities firms doing business with the U.S. public. In conjunction with this role, she is also the Chairman of the FINRA Investor Education Foundation, the largest foundation in the U.S. dedicated to investor education. FINRA is an amalgamation of the National Association of Securities Dealers (NASD), which Schapiro ran as Chairman starting in 2006, and the NYSE’s regulatory body. Schapiro was a driving force between this amalgamation and subsequent simplification of these two regulatory bodies.

Schapiro has previously been appointed to government posts by two Republican Presidents and one Democratic President. Two decades ago, President Ronald Reagan named Shapiro a commissioner of the SEC. She was reappointed by President George H.W. Bush and then named acting Chair by President Bill Clinton. Given this background, it is likely she will garner broad bipartisan support.

In 1996, Shapiro became head of the NASD’s regulatory arm and has been widely commended for her role in reforming that part of the NASD. According to John Coffee, a securities law professor at Columbia University, before her tenure, the NASD’s enforcement arm was “seen as more of a nuisance than a threat – it just bored you to death with a thousand little paper-cuts. It has become much more serious and much tougher in the last 10 years, and she does get credit for a lot of that.”

Her key challenge from the outset will be dealing with the Madoff fraud. There are number of blogs and news sources this morning that are already suggesting she may have connections with the Madoff family. This is based on the fact that Madoff, and members of his family including his sons Andrew and Mark, were active for decades in the NASD, which Shapiro previously led. Bernie Madoff’s niece, Shana Madoff, also served on FINRA’s Compliance Advisory Group.

This Madoff connections seems largely circumstantial and, undoubtedly, the Obama team has fully vetted any association. That said, dealing with the fraud and its after effects in terms of regulation will be Schapiro’s first key leadership test. After years of uninspired leadership at the SEC, we hope that Schapiro steps up big time and her track certainly suggests she is qualified and ready to do just that.

Schapiro’s last public speech was the FINRA Fall Securities Conference and I could have pulled out a number of excerpts, but one in particular that struck me was the following:

“I think we can all agree that both the management of systemic risk and the protection of individual investors are important to the smooth operation of our financial markets. But are they really at odds with another? In my view, they represent two sides of the same coin.”

Her point is prescient in that she seems to get that, while managing risk is critical, so is ensuring that investors have the confidence to allocate risk capital. In light of the Madoff fraud, restoring this investor confidence, through the SEC, will be of utmost importance. If she can accomplish this quickly in a transparent manner, it could be a real positive catalyst for capital markets.

Daryl G. Jones
Managing Director

Keith R. McCullough
CEO & Chief Investment Officer

VIX Down Another 10 - As In Percent!

Volatility is smashing the bears in the teeth. Every time the market has a mini-selloff, it is no longer confirmed by a ramp up of the VIX. The SP500 is basically flat on the day here, but the VIX has now broken 45, trading down another -10% from where we signaled the bear mace sirens yesterday. My critical “Trend” line of support for the VIX was $50.14; now that we’ve cracked that and confirmed it, support becomes major resistance up at $50.81.

I would tread very carefully into your short positions – it takes a bear to know one. This is starting to get painful for the bears who are still looking for panic selloffs. The freak-outs aren’t coming as predictably as they used to. This remains an objective trader’s tape. The math is winning.

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Why We're Out of Germany (EWG)...

Markets appreciate and depreciate based on the confidence people have in them…

German expectations just came in at a 25 year low… and that’s the best story in Western Europe!

In sharp contrast to the improving confidence surveys we have been highlighting in the USA, Germany’s continues to worsen. The data released by the IFO institute this morning paints a bleak picture of sentiment among German business leaders with the primary confidence indicator reaching 82.6 –the lowest level the survey has reached since 1982. Ominously, the survey index specific to future expectations declined further to 76.8, suggesting that corporate leaders there will not be making capital investments in the near term (even if they should).

We sold our German position yesterday with the EWG ETF up +33% since mid November, and booked a modest gain. Although we continue to view the German economy as the strongest in Europe on a relative basis, we are taking a “wait and see” stance for Europe as a whole until the data changes.

The Euro’s 10th birthday is on January 1st, and the prospects for exporters have darkened materially ahead of what was supposed to be a devaluation party. The Germans can thank Hank the Tank and “Heli-Ben” for the surprise.

Andrew Barber

Claiming Another Win For the Bulls

This week’s jobless claims # came in lower at 554,000. That’s a 21,000 decrease from last week but still more than 10,000 above the 4 week moving average. In our “Trade” vs. “Trend” operating language, the “Trade” here is down off of the peak (like we proactively predicted it would when I made this bullish call last week), and the “Trend” remains negative.

When negative “Trends” are known, that’s called consensus. What matters to markets is what happens on the margin. On the margin, this week’s jobless claims report was better than horrifying. The shorts who were looking for a new high in claims have to cover.

My upside immediate term target in the SP500 is currently 926. On balance, I remain bullish on the US stock market’s “Trade.”

Finding Frodo Baggins

“If you’re not confused, you’re not paying attention.”
-Tom Peters
When Tom Peters wrote “In Search Of Excellence” in 1982, this country was looking for answers - and it was looking for change. His primary focus was on leadership, and getting back to a corporate America that inspired individual capitalistic instinct as opposed to the burdensome corporate overhead culture that had dominated the times. Sound like a remedy for all that ails American leadership today? That’s a rhetorical question. Groupthink sits at the top of my league table of where this country went wrong in 2008.
How many times do we have to pick up a newspaper or listen to one of the financial media network’s interviews of the said savants of the American financial system and read or hear the following: “I’m not an economist… I don’t have a crystal ball… I don’t think anyone saw this coming…” It’s really tiring and pathetic altogether. The reality is that there were plenty of people in the room who raised their hands and/or proactively predicted that this movie wouldn’t end well – but the said leaders of our largest companies, endowments, and government regulatory institutions didn’t listen.
It’s very easy to get “confused” if you hear but don’t listen. I think my Dad told me that when I was 3 years old. While that’s close to the age of Paulson’s appointed “Director of Financial Stability” program’s business career on Wall Street, it’s also a very basic thought process. At the peak of this reactive management culture we have built, the crackberry became king. The money became the reward. Now, it’s time to listen, turn it all off, and change.
Obama is making two more very important changes to the USA’s leadership lineup this morning by appointing David Tarullo to the Federal Reserve and Mary Shapiro to be the new head of the SEC. Yesterday I was saddened while I watched the current SEC groupthink head, Chris Cox, and Bernie Madoff, chased around by the manic media. One of these said leaders oversaw the doings of the other – everyone was getting paid to “not pay attention.” We can drag Arthur Levitt and every other ex-SEC chief onto the You Tube mats this morning and next, you’re not going to get any other answer from them than a narrative fallacy. There is no accountability in that - it’s time for change.
Change is good, and at least rhetorically, “no drama” Obama is going to expedite it. Like my paying attention to the leadership at Lehman, Goldman, and Morgan Stanley over the course of the last 10 years, the Democrats have been taking pretty good notes. No matter what your politics, Obama is right on espousing the American principles of transparency, accountability, and trust – that’s why over 70% of adults polled (Republicans too) are “optimistic” about the President Elect’s opportunities. The opportunity for change has never been more obvious – not because Obama and I have been so right on our “calls” in 2008, but simply because the people we have been ‘You Tubing’ have been so glaringly wrong.
Back to making the daily “call” on global markets… this morning reflects more of the same. Asian stock markets continue to build confidence on the back of Chinese capitalistic actions, and that lonely ole dark hole of October/November USA is starting to see shimmers of a global light. My view is that the balance of power in global economic leadership continues to shift. If the leaders of this country “don’t have a crystal ball”, why not find new ones that do – we have incorporated in Hong Kong and have men on the ground in Macau – they carry crystal blue Hedgeye orbs in their pockets. They get the Chinese news before most Americans do – mostly because they are on premise… but heh, the storytellers of Wall Street can call them my “Frodos” of finance, and I’ll be cool with that.
I don’t rain down on Bloomberg like I do CNBC, primarily because that would be dumb. Bloomberg generally sticks to the facts, and is smart enough to know what they don’t know. Bloomberg TV rarely has 8 people in boxes being queued by crackberry addicts and yelling at one another. Bloomberg seems to actually listen rather than hear.
That said, this morning my Chinese “Frodos” flashed me a headline story on Bloomberg this morning titled “Zhou stokes speculation – China poised for Rate Cuts”… pardon? We broke that news 3 days ago – “C’Mon Man!”
Since we have a process that I wake up to every morning (i.e. anything that’s new news in China is sent to my inbox by 3AM EST), maybe that’s why I haven’t been “confused” in 2008. I guess I haven’t been “paying attention” to the Street’s views, or stale and manic “breaking” reports of the narrative fallacy. The reality is that if you are paying attention to the right proactive risk management process, you have not been confused in 2008.
For now, it’s better to be on the buy side of the SP500, using a buying range of 867-890, and a selling range of . The facts are changing and they aren’t confusing. Volatility continues to dampen alongside low volume down days and higher volume up ones. Breadth is expanding alongside this country’s leadership changing – that’s a trading range that I can believe in. We are all in “Search Of Excellence”, not excuses. The time for change has come.
Best of luck out there today,
Long ETFs
SPY-S&P 500 Depository Receipts – Front month CME S&P 500 contracts traded as high as 909.7 in trading this morning before 7AM.
VYM -Vanguard High Dividend Yield –The FDA gave approval for a new zero-calorie sweetener, “Truvia” developed by Coca-Cola (VYM: 2.5%) and Cargill yesterday.
DIA –DIAMONDS Trust Series – Front month CBOT DJIA contracts traded as high as 8,861 in trading this morning before 7AM.
EWZ – iShares Brazil—Carrefour SA, Europe’s biggest retailer, plans to open as many as four new stores in Brazil. Lenovo Group, China’s biggest maker of personal computers, is in talks with Brazil’s Positivo Informatica over a strategic alliance.
EWH –iShares Hong Kong – The Hang Seng closed up in trading today at 15497.81, or 0.24%, led by developers on expectations China will cut interest rates and support the real estate market.
 FXI –iShares China – CSI300 closed up 2.18% at 2045.10. China cut fuel prices for the first time in almost two years in response to slumped crude prices. Gasoline slashed 14%, diesel by 18%, and jet fuel by 32%. Expectations of an interest rate cut following Chinese central bank Governor Zhou Xiaochuan’s reiteration yesterday of China’s low inflation number for November of 2.4%.
Short ETFs
FXY – CurrencyShares Japanese Yen Trust – The Yen fell to 88.69 per USD after Japanese officials signaled they may intervene in the foreign-exchange markets for the first time in four years.
Keith R. McCullough
CEO & Chief Investment Officer

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