CCL’s valuation looks reasonable based on Street 2009 estimates of $2.15, in line with management guidance of $2.10-2.30.  Moreover, the Street estimates look doable, although they should probably be reduced with the recent spike in fuel costs and FX moves.  At current spot rates, fuel costs will be about 5% higher in Q2 than management’s guidance and 9% higher in 2H 2009.  Nonetheless, EPS estimates are probably in the ball park.

It is 2010 where we differ materially.  Our $1.33 estimate is 40% below the Street.  Analysts are currently projecting flat to slightly down yields for 2010.  I’d like to speak to their economists that are projecting such growth in consumer spending to offset the 9% industry capacity growth slated for 2010.  Even in a big 2010 rebound scenario, demand probably won’t grow more than 3-5% which still implies down 4-6% yields.  That seems to be a best case scenario.  We are projecting net yields to decline over 7% in 2010.  There is no good news on the capacity front.  New ships are being built and old ships are not being scrapped.


CCL does not look any better on a free cash flow basis.  The significant capacity additions and negative working capital will drive FCF down to a negative $700 million and $1 billion in 2009 and 2010, respectively.  In prior years, as CCL grew capacity and had positive yields, they had a working capital benefit from growing customer deposits.  This trend reversed itself in 2008 as the booking window narrowed, and yield growth came to a halt.  Free cash flow turns positive in 2011, but even on these numbers the FCF yield is not compelling at only 3%.

CCL: NOT CHEAP ON REALISTIC 2010 - ccl free cash flow


Turning to the balance sheet, it is in pretty good shape at only 3x leveraged.  However, if we are correct, leverage will increase in 2010 to 4x.  Liquidity is fine for now although CCL will likely need additional financing in 2010 as we project a $600 million cash shortfall.  We don’t anticipate this being a problem, especially since CCL had two export credits totaling $500 million awaiting insurance policies at the end of the March.

So what’s the appeal?  Visibility has improved since CCL lowered prices and its guidance so 2009 bookings look fairly solid.  At some point, investors need to focus on 2010 earnings, the ugly 2010/2011 capacity picture, and the long-term demographical challenge (see our 04/03/2009 note “THE TRIPLE THREAT TO CRUISERS”).  As the focus moves forward we believe the market will be unwilling to pay 19x for this earnings stream.


Chinese GDP Prints this evening. Traders with an appetite for risk might look at the options market


The Chinese Bureau of Statistics releases Q1 GDP tonight, and NBS spokesman Li Xiaochao will be hosting a press conference at 10am Beijing time to announce the data. In the wake of the comments made by the Premier over the weekend while he was attending the aborted ASEAN summit in Bangkok, expectations are running high despite all of the obvious negative data points for exports and production which have arrived in recent months. 


Our preferred ETF vehicle for China, CAF, does not have option available. FXI, which has significant Hong Kong exposure, does have options and as such I am looking at it as a (somewhat flawed) volatility surrogate. Despite structural flaws, the volatility levels implied FXI options may be appealing to speculators.


Chinese indices have had significantly higher realized volatility Than US equivalents recently:



Specifically looking at options expiring this Friday, with FXI at 32.95 traders may find the Apr. 33 strike Calls and Apr. 32 Strike Puts an attractive (if risky way) to capture any major move above 34 or below 31 driven by tonight’s data.


The VIX, at 32.7, is only 7.3 % higher than 30 day realized on the SPY, while at-the-money SPY calls expiring this Friday are trading at implied volatility levels more than 10 % higher. Meanwhile at 54.8 for the April 33 Strike calls and 56.05 April 32 strike Puts –the implied volatility for FXI options is actually below  both the 30 & 90 day realized vol level (obviously skewed by liquidity etc) and also below the realized 90 day vol level of the underlying index. For those looking to capture a really big surprise, this is probably the place that you want to play.


Critically the term structure of implied volatility is nearly flat, meaning that the May contracts although more expensive on an absolute dollar basis, are equally attractive for more conservative traders.


So far trader expectations appear to be split evenly with the ratio of Calls to Puts at 45459 vs. 43809 so far today. We do NOT have an inside track on what the numbers released tonight will look like, nor do we have a firm forecast based on our work –although we remain very bullish on the Chinese ox. 


For those brave souls who want to take a swing,  we salute you.


Andrew Barber


PNK should post a very strong Q1 that we believe will exceed expectations and last year’s performance.  In fact, the size of the beat could be significant as indicated in the first chart.  We project EPS of $0.02 and EBITDA of $47.5 million versus the Street at ($0.02) and $45 million, respectively.  Our estimates may even prove too conservative.  Look for strong revenue and margins at Lumiere Place and in Louisiana to drive the upside. 


Management usually puts forward a theme with every conference call.  This quarter the theme could be particularly interesting, and positive.  We’ve talked a lot about the rising cost of capital, particularly for gaming companies that face covenant, liquidity, and/or refinancing issues.  PNK faces little probability of a covenant breach this year but could be at risk next year.  The safety play is to try and extend, amend, or refinance its current facility which matures 12/2010.  That will mean a significantly higher cost of borrowing.  Depending on the agreement, PNK could pay 300-400bps more on the credit facility.  If the company opts for a high yield offering, the interest rate on this type of debt could approach 15-18%.  Of course, there would be no need to tap the high yield market if PNK cancels development.

I recognize this doesn’t sound positive.  However, the takeaway is that the higher cost of capital may force PNK to delay or suspend development on the Sugarcane Bay and Baton Rouge projects.  I think this would be taken very positively by Street.  It would signal to the investment community that PNK is, indeed, return focused (a frequent criticism of management).  With the cost of capital so high, it’s hard to justify investing in the space.

Thus, the theme will not be “our borrowing costs are going up”.  Rather, the relevant theme may be the transformation of PNK into an IRR-focused, free cash flow machine; a pretty powerful theme indeed.


Today, there are bullish calls on a number of QSR names, including Chipotle (CMG), YUM Brands (YUM) and a bullish initiation on the Wendy’s’/Arby’s Group (WEN).  CMG was also downgraded today, which seems a bit more justified after the stock’s 30% move in the last month and 42% move in the last three months.

There is also a negative call on SBUX this morning and according to Street Account the analyst cites “competitive pressures.”  I’m not sure if there are new pressures that we did not know about yesterday, or if this is a continuation of the street’s bullish call on MCD, my guess is the latter.  The consensus call on McDonalds is that the company can do no wrong and that the new beverage initiative will be a blow out success.  Specialty beverages are not a core competency for McDonald’s; they are expensive to install and complicate the back-of-the-house operations.  This is very different than improving the quality of the chicken nuggets or adding a salad and snack wraps.  I will concede that the success of the improved core drip coffee business gives McDonald’s some “coffee credibility.”  I believe that selling an upgraded drip coffee that people were buying anyway is different than trying to sell a premium product in a challenging economy. 


We have nearly completed a grass roots survey of SBUX March sales trends (not including California and Florida), and they are so good I don’t believe what I’m seeing.  Naturally, I provided a haircut to the numbers, but that would still put SBUX same-store sales (not including Florida and California) at down 2-4%.  Including the other two key states, March comparable sales for SBUX could be down 5-7%.  This would be a significant improvement from the trends in fiscal 1Q09 when same-store sales declined 10%.


An influential McDonald’s sales survey was released last night, which confirms our belief that McDonald’s sales trends are slowing.  The McDonald’s same-store sales chart is using reported numbers, but the timing adjusted numbers for January, February and March would be +3.4%, +6.8% and 4.6%, respectively.  This brings the underlying same-store sales average to 4.9% for 1Q09 vs. 5.0% in 4Q08.  It’s important to note that March and April are the last two easy comps for MCD this year!  Put that into context that the 2 and 3-year average same-store sales trends are already slowing.  This is clear evidence that McDonald’s senior management team is praying that the beverage strategy is a silver bullet for the US business.

As an aside, it looks like Easter hurt the U.S. by 0.5%-1% last year and helped Europe by 2%, so this year March numbers would be helped by about 0.5%-1% in the U.S. and hurt by 2% in Europe, which is why we adjusted the survey’s reported March 5.1% number down by 0.5%.  Even with the Easter timing benefit, however, US 2-year trends slowed in March.



Burger King today reported fiscal 3Q09 worldwide same-store sales of 1.0%, with the US and Canada up 1.6%.  The company stated that earnings were negatively impacted by significant traffic declines in the month of March, across most company-owned restaurant markets, resulting in lower than expected company restaurant margins for the quarter.  I recently highlighted same-store sales trends for the big three and BKC looked to be the loser.  The resurgence in WEN was always going to be bad news for BKC and other weaker competitors in the QSR segment.


Creatively Destructing

"Learning without thought is labor lost."
After spending over a decade working in Manhattan, I've gotten used to observing people while they don't think I'm looking. Is there any other way to learn? Surely there is, but for me it's always been most effective to really just watch people and listen.
Call it coincidence or whatever it may be, but yesterday as I was walking out of 300 Park Avenue in New York, I brushed sleeves at the elevator bank with none other than the man I congratulated in yesterday's Early Look - Lloyd Blankfein...
Goldman's CEO probably doesn't care who I am or what I look like, and for that I am thankful. As my wife will attest, I'm not really into the social climbing thing. As I walked out onto the sidewalk I leaned over to my Partner, Daryl Jones, with a relatively large smile on my face and said " the guy seriously has no idea what's coming."
Mr. Blankfein's stock got pounded yesterday, closing down -12% on the day, leading both the Financials (XLF down -7% on the day) and the overall market lower into the close. Despite the one day selloff on the "news" that everyone with a pulse in this business saw coming, the good news for these horse and buggy whip Investment Banking Inc. execs is that they appear to have saved themselves to play another day.
Good news? For sure. Everyone needs a banker, at a price; and, provided that the XLF can hold its head above the $9.41 line, my risk management process still has the sector trading +4% above what I call the intermediate TREND line. TRENDs are hard to break. Goldman's TREND line support is all the way down at $90/share and Morgan Stanley's is closer to $20. Are these lower prices? Sure - but there's no stress associated with proactively being able to predict that stocks that have gone straight up will correct.
Keeping these horse and buggies alive and operating in this game is actually great news for the rest of us who are going to take market share from them. The American Financial system is undergoing an old school economic secular cleansing that is not unique - it has happened in virtually every other industry, and for Wall Street the time has finally come - Schumpeter called it "Creative Destruction."
Yes, as Creative Destruction takes hold, plenty of execs who are wearing horse blinders in these compromised and conflicted business models will be right stressed - as they should be. Ask the "Wealth Management" dudes at UBS how it felt seeing $20B (as in beeelion) in client assets just walk out the door. Learning that one's stress can become your economic reward, is a thought, that we can all respect as being far away from a Capitalist's labor lost.
Throughout the US stock market's 24% rally from the March 9th low, we have learned plenty. One of the main lessons learned is that the Three Horseman sectors that are NOT US Financials (XLF), Technology (XLK), Consumer Discretionary (XLY), and Basic Materials (XLB), can lead us higher as the US Financials deal with their own stresses. This, as the great American analyst, Tim Russert, would have said "is BIG."
Tech and Basic Materials are two of the things that The Client (China) needs. What we have observed in the last month is a very high inverse correlation between these two sectors and the US Dollar. If Bernanke, Obama, or the Chinese themselves can continue to Break The Buck, these American export businesses can start to crush their Western European and Japanese competition.
Competition? What's that? Aren't we trying to compromise and socialize America to smithereens? Thankfully, some will try to... and all the while, this will provide we men and women of American Capitalism Lost the ability to test and toil our new business models while the horse and buggy proprietors aren't looking.
One of my favorite quotes is from Henry Wadsworth Longfellow, and it's one that fits this idea of Creative Destruction like a glove: "Heights by great men reached and kept were not obtained by sudden flight but, while their companions slept, they were toiling upward in the night."
Now, I hardly consider myself a "great man" - nor do I buy into the notion that Wall Street's billionaire lever it up kings are either. However I do know that it takes a tremendous amount of trial and error to evolve. In The New Reality, where our entire industry is now being paid not to make any more mistakes, this is seemingly the best time to be taking measurable risks.
Risk? Yes, ask the short sellers if Squeezy The Shark has been giving them any of that to think about lately. Risk to the downside abates alongside declining volatility. Volatility in this market continues to hit lower lows. The Volatility Index (VIX) flashed no stress during yesterdays overdue US market correction. This remains a very trade-able range where the reward is starting to outstrip the risk on the long side.
Yes, if we break down and close through an SP500 level of 821 and the US Dollar starts to appreciate, the stock market will DEFLATE again... but until we see those facts on the front center of our screens, a better question remains - why am I not longer of US stocks?
In t-minus 2.5 hours, I'll be answering the opening bell on that question. I'm looking forward to buying from those who don't see me coming, as they creatively destruct.
Best of luck out there today,


XLK - SPDR Technology - Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last six+ weeks.   As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (despite recent doubts about an IBM/JAVA deal being done).  The other big near-term factors to watch will be 1Q09 earnings - which is typically the toughest for tech, along with 2Q09 guide.  There are also preliminary signs that technology spending could be an early beneficiary of the stimulus plan.

TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLB - SPDR Materials -If the USD goes up, XLB deflates. It's a bull on both a TREND and TRADE duration. The Materials sector is, obviously, a key beneficiary of our re-flation thesis.  Domestically, materials equities should also benefit as the stimulus plan begins to move into action.

USO - Oil Fund-We bought oil on 3/25 for a TRADE and are positive on the commodity from a TREND perspective. With the uptick of volatility in the contango, we're buying the curve with USO rather than the front month contract.  

EWC - iShares Canada-We bought Canada on 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 large government recent history, and believe next year's Olympics in resource 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.
GLD - SPDR Gold-We bought more gold on 4/02. We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.

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%.

SHY - iShares 1-3 Year Treasury Bonds- 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.

EWU - iShares UK - We shorted the UK on 4/08. 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 as inflation has slowed considerably. GDP declined 1.5% in Q1, unemployment  is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month.

EWL - iShares Switzerland - We shorted Switzerland on 4/07 and believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.

UUP - U.S. Dollar Index -We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.3247. The USD is up versus the Yen at 99.1040 and down versus the Pound at $1.4932 as of 6am today.

EWJ - iShares Japan -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".

XLP - SPDR Consumer Staples- Consumer Staples continues to look negative as a TREND. This group is low beta and won't perform like Tech and Basic Materials do on market up days. There is a lot of currency and demand risk embedded in the P&L's of some of the large consumer staple multi-nationals; particularly in Latin America, Europe, and Japan.


Co-chairman/founder’s Eisenberg and Feinstein sold 2.15 million shares on 4/09, the largest sale by insiders over the past five years.  The shares represent approximately 20% of their direct and indirect holdings, not accounting for any options.  The absolute number of shares is eye-opening by historical standards – even though the entire amount was sold by their trusts with a lesser portion sold by their charitable foundations. Additional executives, including the CEO, also reported sales resulting from option exercises that were all slated to expire by the end of this year.


Overall, the 13 insiders retain a 4% position in the company, making them the 6th largest holders of company shares.


Alright, let’s face some facts. I’m never thrilled to see that level of sales activity. If they are selling, then why should I buy?  There are three reasons I’m not overly concerned about the activity.

1)      The stock doubled over four months and is up 60% in 6 weeks. If I were them I might sell some stock too.  

2)      History suggests that management has not been particularly good with timing of stock trades (see chart). It’s a good thing that they manage retail stores instead of portfolios.

3)      Lastly, and most importantly, BBBY management, like most management teams I know in Consumer, does not ‘do macro.’  These guys are basing their forecasts on bottom-up models with a loose macro beacon set by Wall Street research. Based on the collective work of our industry and Macro teams, we think that the softline retail supply chain will have a tailwind for much of the next year. I don’t think that management appreciates that yet. See our recent research on the topic for more color.


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