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Casual Dining – RT and the last piece of the puzzle

Reduced capital spending and shrinking capacity favor large cap casual dining names.

I’m now focused on what is the critical component to the recovery and improved health in the casual dining segment. The industry behaving rationally!

As you can see in the accompanying chart, the industry has been slashing capital spending for the past year and this trend will continue into 2009. This will allow the industry to focus more on running its existing operations better, which always leads to improved ROI. On top of this, we expect to see existing capacity of the weaker players close, benefiting the strong.

This is evident in the actions of RT last night. Last night, RT announced it will incur restructuring charges in its 2Q09 and 3Q09 related to impairment and lease charges. Importantly, these charges are associated with the closure of approximately 40 locations in 3Q09 and approximately 30 additional locations anticipated to close over the next several years, as well as a non-cash impairment charge related to approximately 35-40 surplus properties which are marketed for sale.

One of my favorite themes in the restaurant industry is “shrink to grow.” See my November 12 post titled “Shrink To Grow” that briefly explains the thought process. RT is playing into that theme perfectly. RT’s announcement, while extremely difficult for the company on a number of fronts is the right one for the company. The company has effectively improved the profitability of the company by eliminating 11% of the store base that was unprofitable. For RT, specifically, it pushes out the threat of bankruptcy by 6-12 months.

I also want to point out that EAT is a big beneficiary from the closing of the RT stores as they are direct competitors within the bar and grill segment. Importantly, RT is not alone. As we move into 2009 I would expect to see the casual dining industry shrink capacity significantly.

China Chart: You Tell Me...

With the Chinese holding the healthiest (most liquid) balance sheet in the world, cutting rates, and cutting domestic taxes, where is the next big move in the chart below?

The Shanghai Composite Index up another +2% last night at 2015. I have a major “Trend” breakout line sitting 13 points away, and my team remains as bullish as they have been on Chinese prospects to re-accelerate growth from the Q4 lows in Q1 of 2009.

We remain long both the FXI and EWH etfs. Buy them on down days.
KM

Trading The New Reality's Gold "Trend"?

As the US$ and VIX are breaking down through critical intermediate term “Trend” support, Gold is breaking out through the same.

For the “Macro Men” on our desk here in the Haven, this makes perfect sense. These macro indicators are all correlated.

Don’t short gold; buy it on down days. Don’t buy it on the 1st down day like today – wait on it; patience has paid in this market and it will pay you here. There is a solid gold support line built up at $801/oz (see chart).

“Re-Flation” cometh. This is The New Reality.
KM

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T-Boone Bullish?

We bought Oil today because the math makes sense again - anywhere under $39.15 strikes buy in our models.

Looking at the chart below, I was never quite sure what was in “their” models back in July, but that’s of no concern to anyone anymore. Been there, done that.

As global stock market volatility continues to decline, so will the propensity for investment banks to allocate capital to “prop” traders who want to lever their brains out buying everything “Chindia-Oil.”

Alongside the drop-off of players in the game, enter the hockey players from New haven. With the fundamental backdrop of our “Re-Flation” Investment Theme for early 2009 and a swooning US Dollar, we think we can trade oil very comfortably within a range of $37.11- $51.70.

T-Boone Barber
Director

Tech doesn't have the "Fast Money" that it used to...

Howard Penney and I have been building out our new Sector Strategy product…

If you look at the nine SP500 sector exposure analysis we have recently been running, there are 3 things about Technology that I think are misunderstood:

1. Both the underlying XLK short interest and bottoms up stock short int is amongst the lowest of the 9 sectors
2. Valuation on NTM is the highest at 7.2x EBITDA
3. Sector Beta, for the 1st time in forever is very low in Tech at 0.93

In other words less shorts to squeeze, less incremental value to buy, and less juice on market up days (XLK is #6 out of 9 in terms of beta!... financials, discretionary, materials, and energy is where the traders get most of their rips).

We have recently announced that Rebecca Runkle has joined our team as head of Technology. Most of you will remember Rebecca from her days on the sell side at Morgan Stanley. With McGough, Penney, and Runkle we have taken a nice whack out of what used to make Morgan Stanley great.

RIMM’s 2008 stock price chart is a metaphor for the life of a reactive Wall Street crackberry addict falling out of favor. We’re looking forward to having Runkle’s experienced and patient point of view Captaining our Technology research effort.

They don’t trade Tech like they used to.
KM

Keith R. McCullough
CEO & Chief Investment Officer

CCL: A TRANSCRIPT WITH SYNTHESIS

SUMMARY:

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.

NOTES

General
- 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.

Liquidity:
- 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)

2Q09:
- 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.

3Q09:
- 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.

Q&A:
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.

Opportunities:
- 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

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