Our conclusions are largely the same as our thoughts in our 2/26/09 post “CRUISING TOWARDS STABILITY” with the big difference that RCL & CCL have had huge rallies… and aren’t as cheap. CCL confirmed that lower pricing have allowed bookings to find some stability, 1H09 bookings aren’t as bad as some have feared, ship financing is still available, and lower fuel costs are a huge tailwind. CCL also confirmed that there is little visibility and, given the shorter term booking, 2H09 will likely be worse than expected and higher end product is fairing much worse.
Now that everyone is on the same page and stocks have had a healthy run, we remain concerned about 2010 capacity issues and that the street is too high in their expectations. We seem to be back to the fundamentals being awful vs. worrying about the credit and the near-term. Unfortunately, CCL’s release and earnings call didn’t provide any insight to change our intermediate and longer term concerns surrounding capacity increases, demographics, and the sustainability of the decent European trends.
The following is a “youtube” of our 2/26 post reconciled with CCL’s earnings release and conference call.
“CRUISING TOWARDS STABILITY 02/26/09 10:12 PM EST”
“Wave season may be better than feared, Europe is holding up (surprise), and overall bookings are stabilizing.”
CCL confirmed that European demand is holding up better than NA demand for a myriad of reasons:
- Less penetration
- Europeans don’t rely on credit to purchase cruises
- More vacation time/it’s a local trip/etc
However, on a dollar basis yields will clearly be quite bad with the FX drag although not as bad as before the recent dollar move and CCL has already factored this into their guidance
“RCL and CCL are down 83% and 54%, respectively, from their 52 week highs.”
CCL has rallied 17.4% since our note and is probably trading into the mid-teens on our trough 2010 estimate
“However, there has been no deterioration since the tough Q4. Pricing is probably down 10‐15% but consumers are responding, which is serving to stabilize the market. On the margin, the wave season and pace of forward bookings are probably a bit better than what the market is expecting. Here are some observations about current trends:”
• “Near term yield, revenue, and earnings guidance still looks reasonable”
CCL beat Q109 expectations by a large margin, partially helped by business that was booked before the fall meltdown and 45% decrease in fuel prices. Clearly RCL won’t have the same fuel benefit because of its hedges. 2Q09 guidance is right in line with consensus
• “Looks like industry has restored booking volume and price equilibrium (granted at lower pricing) post last quarter. That has gotten the ball rolling again for a more normalized pace of business”
CCL confirmed the statement above
• “Wave season, seems to have not tapered off yet and bookings are going at a healthy pace (again, at lower prices with greater incentives being offered).”
CCL confirmed the statement above
• “Europe has been surprisingly robust, especially the UK, despite the large capacity additions.”
CCL confirmed the statement above
• “There will be a big mix shift towards cheaper cruise options (shorter, inner cabin booking vs. balcony, closer ports).”
CCL confirmed the statement above
• “Alaska is faring poorly because of this mix shift and due to the short booking window. People are just not booking for Q3 yet.”
Booking pace is poor with occupancies down and pricing down materially for Alaskan and exotic cruises. CCL blamed this weakness in Alaska partly on the $50 tax surcharge; we suspect this is a small part of the problem compared to the cost of the flight to get to the port of departure and overall cost of the cruise. CCL also spoke about competitors taking capacity out of Alaska and following suit. The issue is that they are simply shifting capacity to another market, and they don’t really have any healthy markets … just “less bad” ones. Not being able to take out capacity is a huge structural issue for this industry, given that even at current depressed levels ships are still FCF positive and everyone is managing the business for cash right now.
The Research Edge MACRO team believes that the Eurozone looks nothing short of a disaster, as the economic crisis sweeping Central and Eastern Europe continues to claim more victims. The political issues facing many countries in Europe are spreading into the labor market, impacting the economies of Europe.
I don’t think MCD is immune!
During MCD’s 4Q earnings call, management stated that about 40% of Europe’s comparable sales number has been driven by traffic, which implies that average check makes up the remaining 60%. We knew going into 1Q09, that average check in Europe could come under pressure as management stated that it would not implement the same level of pricing in 1H09 that it typically would “because you’ve got to consider how the consumer is feeling and during these times the consumer is looking for deals and we want to make sure that we’re out there." Specifically, management stated that the “German consumer is very sensitive to pricing."
The slowing in Europe’s February sales was hurt by weakness in Germany, which is a trend that is continuing from the fourth quarter. For reference, Europe was MCD’s largest geographic region on a sales basis in 2008, representing 42% of total company sales, and France, Germany and the U.K. accounted for 55% of Europe’s revenues. That being said, the sequential slowdown in reported quarter-to-date same-store sales in Europe is of significance and looks to slow further in March.
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"You cannot help men permanently by doing for them what they could and should do for themselves."
On the score of a one factor model (leadership), using 1-day as my duration, I thought President Obama did a solid job last night. Using that same duration, I thought Timmy Geithner was awful yesterday. These aren't partisan points - they are simply my judgment calls on two men and their respective character.
Lincoln taught us that sound judgment and awareness are invaluable leadership attributes. We need more people in the seats that matter in this country to start calling things out that plain Americans with a YouTube are already concluding for themselves at their kitchen tables. When Geithner speaks, anyone with main street smarts cringes... he's what the boys back in my hometown of Thunder Bay, Ontario would call a Squirrel Hunter...
Some people who read this and consider themselves of the haute couture class won't get that, and that's fine - they're squirrel hunters too, and we don't want them leading America into The New Reality. Where this country is going requires a broader sense of societal responsibility than just how much money we make. Some people have learned nothing from the US Financial System crashing, and we cannot help these people "by doing for them what they should do for themselves."
Whether it was Pete Najarian on Fast Money chanting that the real growth in this market lies in "levering up toxic assets" or Jimmy Cramer shamelessly dancing around the CNBC set to Beyonce's "Halo" applauding the Treasury Secretary's performance - this is all one and the same folks - a circus... and at some point it just needs to stop.
Squirrel Hunters have no memory, no shame, and no pride. Najarian can get all amped up about the immediate term TRADE breakouts in Goldman Sachs, Morgan Stanley, and Blackstone all he wants, but if this country's future lies in the hands of those executives who brought this great American financial system to its knees, America will not be "helped permanently" - and this will not end well.
The Client gets this. The Client's name is China. While Goldman talks about selling their handshake with their Chinese investment in ICBC (Chinese bank), so that they can TRADE into bidding on Barclays I-Shares (which is a UK asset selling at another government sponsored fire-sale, where Goldman uses our government's TARP moneys to bid??), the Chinese are moving forward shaking hands with new business partners around the world.
Overnight, the Australian stock market continued its impressive run (up +14% since March 6th) after Chinalco was cleared by Aussi regulators to buy their $19.5B stake in mining giant, Rio. After securing $25B in oil and natural gas partnerships with the Chinese, the Russian stock market has been charging forward alongside The Client as well. The Russian Trading System Index is up another +2% so far this morning, and now +16.6% for 2009 to-date. Yes, Squirrel Hunters, fire up your engines - I am going to proactively predict that you begin to trumpet the Russian ETF that we have been long, RSX, in the very near future...
You see, despite it's fantastic +21.6% trough-to-peak short squeeze from the SP500's 676 low, the USA's score is still -10.7% for 2009 to-date. This is not a bull market. This is a bear market that ripped the snouts off of the "hedgie" Squirrels who shorted the lows. No, I did not buy into the book selling narrative fallacy that the US economy is in a Great Depression; but I will sign off on the call that the said leadership in this country, from the aforementioned cable network to US Congress is indeed depressing.
American Idol had to push its show forward by a day in order to make room for Obama's prime time appearance last night. I'm a huge fan of success, and I absolutely love the democratization of success associated with that show. American Idol stands for a lot of principles that are transcending in The New Reality. America wants to participate - she wants the voice of her people to be heard. If there's a Squirrel Hunter on the screens, she wants to vote them off - if there's a winner, they want to champion that just as readily.
This is America. These challenges we face from a leadership perspective are real. We need to unlearn a lot of the received "wisdom" of those puppeteering our financial system. We need to re-learn what made this country great. We need to evolve.
The Chinese are providing not only the financial discipline associated with having savings embedded in their society's culture, but leadership in their ability to permanently help the global economy evolve.
The US Bond market started to break down again yesterday. Yes, we all know that Bernanke's US Treasury Bond buyback program goes live today... but will that bid be enough? Are we doing the right things to permanently fix what has been revealed as a structurally impaired financial system? Do we have credible leaders in place that the Chinese can trust?
Don't forget - China is The Client. China has the cash. China owns our debts. And China knows exactly what a Squirrel Hunter looks like when YouTubed...
The risk/reward in the SP500 this morning is evenly balanced at +/- 3%. My intermediate TREND line resistance in the SP500 remains 829. For now, TRADE the range.
Best of luck out there today,
EWC - iShares Canada-We bought Canada on Friday 3/20 into the selloff. We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's socialist past, and believe next year's Olympics in gold-rich Vancouver should provide a positive catalyst for investors to get long the country.
DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold.
XLK - SPDR Technology-Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last several weeks. Semiconductor stocks, which are early cycle, have provided numerous positive data points on the back of destocking in the channel and overall end demand appears to be stabilizing. Software earnings from ADBE and ORCL were less than toxic this week and point to a "less bad" environment. As the world stabilizes, M&A should pick up given cash rich balance sheets in this sector and an IBM/JAVA transaction may well prove the catalyst to get things going.
EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months. With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.
GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish TREND.
DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.
LQD - iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.
EWJ - iShares Japan - Into the strength associated with the recent market squeeze, we re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".
EWU - iShares UK -The UK economy is in its deepest recession since WWII. We're bearish on the country because of a number of macro factors. From a monetary standpoint we believe the Central Bank has done "too little too late" to manage the interest rate and now it is running out of room to cut. The benchmark currently stands at 0.50% after a 50bps reduction on 3/5. While the Central Bank is printing money and buying government Treasuries to help capitalize its increasingly nationalized banks, the country has a considerable ways to go to attain its 2% inflation target. Unemployment is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month.
DIA -Diamonds Trust-We shorted the DJIA on Friday (3/13) and Tuesday (3/24) and believe on a TRADE basis, the risk / reward for the market favors the downside.
EWW - iShares Mexico- We're short Mexico due in part to the country's dependence on export revenues from one monopolistic oil company, PEMEX. Mexican oil exports contribute significantly to the country's total export revenue and PEMEX pays a sizable percentage of taxes and royalties to the federal government's budget. This relationship is unstable due to the volatility of oil prices, the inability of PEMEX to pay down its debt, and the fact that PEMEX's crude oil production has been in decline since 2004 and is down 10% YTD. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.
\IFN -The India Fund- We have had a consistently negative bias on Indian equities since we launched the firm early last year. We believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit. Trade data for February paints a grim picture with exports declining by 15.87% Y/Y and imports sliding by 18.22%.
XLP - SPDR Consumer Staples-Consumer Staples was the second best sector yesterday. XLP has a positive TRADE and negative TREND duration.
SHY - iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries
The debt is currently trading at between 45 and 50 cents on the dollar. Even if LVS tenders at 55, this would be a significant deleveraging event. We calculate at that price with cash on hand, LVS would reduce leverage by 0.75x, effectively putting them in the clear in terms of the leverage covenant in its credit facility for 2009.
While LVS still faces a potential 2010 breach as the maximum leverage ratio steps down, the current move potentially buys them a lot of time.
Brad Stone was a respected member of the LVS executive management team that has had a well known falling out with Chairman Sheldon Adelson. There has been a lot of speculation recently that Mr. Stone was on his way out due to the Adelson relationship and also personal reasons. The release did indicate that Stone was leaving for “personal reasons” which is at least partly true. Mr. Stone has been going through a divorce.
I’m not sure the Brad Stone and LVS marriage is over, however. I think Mr. Adelson might be interested in retaining Mr. Stone and negotiations could be going on currently. While the departure announcement should not be a surprise, any reconciliation would be, and should be considered a positive. Stay tuned.