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Caribbean still a tough pricing environment but Europe is holding its ground.



RCL will likely report earnings next week.  We expect management to comment on the bookings environment improving since the Grandeur of the Seas fire.  However, based on our findings, Caribbean pricing has not improved since the incident.  The pivot variable in its FY2013 guidance is once again determined by the outlook on Europe, which we believe continues to trend better than the company’s conservative forecast.  Better than expected performance in Europe coupled with a weaker Caribbean leads us to forecast FY 2013 yield guidance narrow to 2.5%-3.5% from 2.0-4.0%.  However, there remains risk to the downside, particularly on F3Q.  FY 2013 expectations on the buy-side and sell-side have been lowered in the past month.   2013 FY net yield Street consensus is at 3.1% (Hedgeye: 3.0%).


While it has only been two weeks, pricing seems to be under even more pressure since management issued guidance – not only for the rest of the year but also for 1H 2014.  Management indicated on their conference call that they do not expect the Carnival brand to show yield improvement until 2H 2014.  However, unless Europe shows tangible growth, 2014 consensus for 2.5% net yield growth looks aggressive right now.  It is early but we’re seeing no signs of regaining pricing power in the Caribbean and Mexico.


Here is what we’re seeing from our proprietary pricing survey of >12,000 itineraries for mid-July.  We analyze YoY trends, as well as relative trends, which are determined by pricing compared to the last earnings/guidance date for a cruise operator i.e. RCL: 4/25, CCL: 6/25, NCLH: 5/6





  • Royal Caribbean
    • RC brand pricing for F3Q and F4Q has not recovered from the Grandeur of the Seas (5/27) incident.  For example, Oasis of the Seas which had averaged over $1,000 per itinerary in early June had fallen close to $800 by mid-July (in the respective year ago periods, prices averaged close to $1,000).  Yes, most of the cabins are filled but the lack of pricing stickiness is concerning.  F1Q 2014 RC pricing was also moderately lower while F2Q 2014 pricing was moderately higher and trend was stable.
    • Celebrity’s pricing trend for F4Q and F1Q 2014 was lower with lower YoY pricing.
    • Pullmantur F3Q pricing fell in the mid-digits in early July and remained there in mid-July.  Its F4Q 2013 and F1Q 2014 pricing trend was flat to slightly negative.
  • Carnival brand
    • While it’s only been two weeks since Carnival’s last guidance, pricing is losing ground fast.  FQ4 2013, FQ1 2014, and FQ2 2014 pricing were all lower by double digits YoY.  Pricing trend for FQ4 2013 and FQ1 2014 particularly weakened in the last two weeks.  The Carnival brand accounts for 83% of CCL’s total capacity in the Caribbean.   
  • Norwegian
    • Norwegian's Caribbean pricing trend declined for Q3 2013, mainly due to a 16% tumble in Breakaway prices.  Breakaway prices, which had been resilient in June, finally cracked under a tough pricing environment.  Overall, NCLH Q4 2013 and Q1 2014 pricing trend was flat.  Meanwhile, Getaway’s pricing for February/March 2014 itineraries remained steady, though 12% lower than that seen in May.


  • Royal Caribbean
    • Very close-in F3Q RC pricing was moderately weak.  However, F4Q RC pricing crept into positive territory.
    • Celebrity YoY pricing remained nicely higher in the double digits for F3Q and F4Q. 
    • Pullmantur Mediterranean very close-in F3Q pricing was stronger in the two weeks ago but F4Q pricing trend deteriorated.
    • European capacity accounts for 49% and 25% of total capacity in F3Q and F4Q, respectively. Celebrity accounts for 33% of capacity in F3Q and F4Q, respectively, while the RC brand accounts for 48% and 35% of capacity in F3Q and F4Q, respectively.
  • Carnival
    • Costa F3Q pricing, which continued to fall since June, was unchanged relative to the beginning of July.  Costa’s FQ4 pricing remained strong at double digit growth.  Costa’s early FQ1/FQ2 2014 pricing did not change much.  Princess, Cunard, and AIDA F3Q/F4Q pricing trend were fairly stable, while Holland America pricing declined slightly in the last two weeks.
    • We estimate Costa accounts for 40-50% of total European capacity in F3Q and F4Q
  • Norwegian
    • F3Q prices continued its downward trend since May. F1Q 2014 pricing improved slightly. 





Not many itineraries left.  Holland America continued to discount aggressively in F3Q and F4Q.  Norwegian and the RC brand also slashed F3Q prices.  On the brighter side, Princess pricing was impressively higher YoY.



Carnival brand’s pricing struggles in Mexico remain for F3Q, partially due to hard comps.  Carnival brand’s F4Q 2013 and F1Q 2014 pricing both took a heavy hit in July and trend is declining.  



1Q 2014 RC brand pricing strengthened in mid-July.  Costa’s F4Q 2013 and F1Q 2014 pricing remained robust.


Client Talking Points


So, China’s Finance Minister says they “won’t use large scale stimulus.” Take his word for it. Shanghai Composite led losers down -1% in Asia overnight. Meawhile, Singapore put up a nasty (ex-Oil) Export print of -8.8% year-over-year in June. What that says is ex-Japan Asia #GrowthSlowing.


Everyone and their brother are trying to front-run Ben Bernanke breathing appointments at this point. It's sad, but that’s the reality. CRB Index up +0.6% yesterday with Gold, Oil, etc chasing higher on a -0.7% US Dollar day. Will Bernanke be dovish enough? We shall see. But this is a certified central planning expectations circus; EUR/USD TAIL risk line is 1.31. That could go either way.


Copper down -1.1% on the China reality-check (short CAT again on that too). But Brent is still pinning her hopes on Benny. $109.40 last is above our long-term TAIL line of $107.86. That's important. The net long position in futures/options for everything crude oil has gone hog wild; over 325,000 net longs! (biggest long lean of the year).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road. 

Three for the Road


Goldman upgrades $LINE $LNCO to Buy. We reiterate Sell.



"We keep kicking the can down the road. But maybe now we're at the point where the can is kicking back"

- Jim Chanos


$487.9 Million: The total amount in fines and penalties Barclays and four former traders must pay in an order tied to an investigation of alleged manipulation of energy markets. (Bloomberg)

Heaven and Power

This note was originally published at 8am on July 03, 2013 for Hedgeye subscribers.

I am quite unable to see why Heaven or any other Power should object to our telling the Moslem what he ought to think.”

-Arthur Balfour


It’s no wonder why history remembers Lloyd George’s decision making process in Paris in 1919 as so politically conflicted and morally confused. Balfour (British Foreign Secretary 1916-191) and Henry Wilson (George’s chief of the British Imperial Staff) would almost come to blows on big imperialist planning topics (like what to do in Turkey).


Also overlooked were the Turks themselves. Almost everyone in Paris assumed that they would simply do as they were told. When Edwin Montagu, the British Secretary of State for India cried, “Let us not for Heaven’s sake, tell the Moslem what he ought to think, let us recognize what they do think.” (Paris 1919, Six Months That Changed The World, pg 380)


Does getting a bunch of pompous politicians in a room in Paris solve or perpetuate the world’s long-term risks? Post WWI, the answer to that was a disaster. There’s no reason to believe that trying to centrally plan the Egyptians or Portuguese this morning is going to be a success story either. Our centrally planned world is long of political arrogance and short of human empathy.


Back to the Global Macro Grind


From a globally interconnected risk perspective, this morning is one of the uglier ones I’ve seen in the last few months. It’s not just Egypt jamming oil prices up and Portuguese bond yields blasting higher either. Here’s what’s going on:


1.   ASIA – Indonesian stocks (-3%) and the Hang Seng (-2.5%) led a broad based ex-Japan meltdown in Asian Equities overnight. China printed another miss on the Services PMI front (53.9 vs 54.3) in June and it has become clear that Asian #GrowthSlowing is a reality. Every single Asian Equity market other than Japan is now bearish TREND @Hedgeye.


2.   EUROPE – Greek stocks continue to crash this morning (-30% since May 17th); Portugal’s stock market is down -5.7% (10yr bond yield in Portugal tested 8% for the 1st time since November); and the rest of European major Equity markets are trading straight down (Spain -3%, Germany -1.8%, etc); every European Equity market remains bearish TREND @Hedgeye.


3.   CURRENCIES/COMMODITIES – Dollar down small so far, and that’s not a good thing for US Equities (6mth correlation between SPY and USD = +0.76); Brent Oil is testing a breakout back above its $104.95 TREND line @Hedgeye this morning – any sustained close above that price could impose a sequential tax on global consumption in July-August.


Then of course you have Snowden banging around in Bolivia with Morales (or will they be dining in Vienna this evening?) as Obama fans try to put out multiple fires, including another delay on Obamacare.


What on earth could possibly go wrong?


They begged for (and obtained) a mandate for global central planning and now we’re going to have to deal with their mess. How much longer this can continue is anyone’s guess. All the while, there’s one mother-load of their sovereign debts we can short while we wait.


Under our new Global Macro Theme (that was born out of a Q2 one #EmergingOutflows) we are going to roll with emerging #DebtDeflation here in Q312. Yesterday we re-shorted the iShares USD Emerging Market Debt Bond Fund (EMB) and we’re looking forward to introducing a whole new bag full of short ideas in our upcoming Q3 Hedgeye Macro Themes Call. Basically, short politicians.


So if you can’t buy Sovereign Storyteller’s Debt – and you can’t buy Asian or European Equities, what’s left?

  1. US Dollars
  2. US Equities
  3. Beer, Wine, etc.

It’s a good thing US Equity markets close early today. You can get an early start on allocating some of your hard earned 2013 US Equity gains to option #3.


Since we have 26% of the Hedgeye Asset Allocation in US Dollars this morning and only 14% in US Equities (60% is in Cash, which means 0% allocations to International Equities, Fixed Income, and Commodities), we don’t feel like we’ll look entirely naked if the tide rolls out on our 1592 intermediate-term TREND line of support for the SP500 either (5 LONGS, 4 SHORTS @Hedgeye).


Buying anything US Equities is no way to live. Utilities (XLU) versus Consumer Discretionary (XLY) already has a +215 basis point performance spread for Q312 to-date (Utilities -1.28% vs Consumer Discretionary +0.87%). Don’t forget that #StrongDollar and #RisingRates punishes Yield Chasers, people investing in MLPs that can’t pay their dividend (LINE), etc.


As for Heaven and Power, and for the Moslem and Canadian out there that some American central planner wants to pass personal judgment on next, well – on this 4th of July, I’ll be betting on the men and women who will fight for their freedoms, all day long.


Our immediate-term Risk Ranges are now:


UST 10yr 2.41-2.63%

SPX 1599-1627

DAX 7686-8061

VIX 15.31-17.97

USD 82.78-84.04

Oil 100.22-104.95


Happy 4th of July, and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Heaven and Power - Bond Price Deflation


Heaven and Power - vp 7 3

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July 17, 2013

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July 17, 2013 - 10yr

July 17, 2013 - spx

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July 17, 2013 - SHCOMP

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July 17, 2013 - yen

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July 17, 2013 - gold
July 17, 2013 - copper


Pain's Delusion

“The greatest obstacle to pleasure is not pain; it is delusion.”



When I read that in The Swerve (pg 196) I couldn’t stop drawing the analogy between the 14-16th century Vatican and the US Federal Reserve. That might sound a little out there for you this morning, but Bernanke’s fear-mongering dogma is way out there too. Hopefully you can find some balance in between our opposing definitions of economic freedom. I am, if you care, Catholic.


If you stop studying the history of your beliefs, you’ll have issues. At the end of the 4th century, “historian Ammianus Marcellinus complained that Romans had virtually abandoned serious reading.” (pg 93) Getting people to just take the church’s word for it without thinking was a process (no books). “It had taken a thousand years to win the struggle and secure the triumph of pain seeking.” (pg 107)


Mixing politics, religion, and perceived wisdoms – that’s bringing it on thick. But it’s the only way I can remind you that the pattern of changing human beliefs are not new this morning. It’s called education. The delusion that a country needs to be perpetually punished by a weak currency and a 0% return on her hard earned savings is one of the greatest obstacles to free-market pleasures.


Back to the Global Macro Grind


Many are paid to think Bernanke is right. They believe that the US Dollar needs to be beat and whipped whenever it rises from the deadness of it all. Many think bond yields should stay at the 0% bound in perpetuity too. Just don’t forget why – they run Bond funds.


This morning we’re seeing a sharp contrast between American and Chinese economic policies:

  1. In the USA, people who are long Gold, Bonds, and Crude Oil futures continue to beg for Bernanke to talk down tapering
  2. In China, they’re reminding you that the entire world doesn’t sign off on short-term (reactive) Keynesian policy making

In a strikingly simple statement overnight, China’s Finance Minister said that they “won’t use large scale stimulus.” Markets took their word for it. The Shanghai Composite backed off in a hurry and closed down another 1%.


So who wouldn’t like a statement like that? Who will be in pain if, god forbid, Bernanke isn’t dovish in today’s testimony?


1.   Copper – hopefully you aren’t long that bubble. It took the Chinese “news” (in line with Darius Dale’s view that China wasn’t going to stimulate you) seriously and Copper futures fell over -1% immediately. Don’t forget that when China was spending its brains out on “infrastructure” over 3 years ago, it represented almost 2/3 of incremental global copper demand.


2.   Caterpillar – for the last year (as the Mining Capex Bubble began to pop) its CEO, Doug Oberhelman, has sounded like he should be running for political office in the south of France. He wants bailouts and government stimuli in his Chinese order book, baby! Do you blame him? I do. Hope is not an investment process.


Copper and CAT perma-bulls are just two of the many constituencies who lobby The Ben Bernank to whisper sweet-nothings of dovishness in the ears of the WSJ Hilsy (yes, the Jon Hilsenrath) as the Rest of Us just try our best to front-run it all.


If you don’t think that’s what’s really behind the pain-seeking messaging of the Fed, you are delusional. I have never seen the US government spend so much time talking down the one thing all these central plans were supposed to produce – growth.


And I mean real (inflation adjusted) economic growth. In the USA at least, sustained growth has always been married to 2 major (and coincident) leading pro-growth indicators:


1.       #StrongDollar

2.       #RisingRates


So, if you don’t want to step on anyone at the Fed Vatican’s toes – and if you never want to question any of these money-printing pontiffs publicly, you would have probably been cool with taking The Borgias word for it in the 15th and 16th centuries too.


In other news, the US stock market finally had a down day yesterday. That was its 1st down day in the last 9 as the SP500 and Russell2000 backed off their all-time highs of +18% and +23% YTD, respectively.


Immediate-term TRADE overbought is as overbought does, so we’ll see if we can re-load the long book on a correction to a reasonable line of immediate-term TRADE support (for SPY that’s now 1656).


The #1 thing that will stop me from getting really long again is Bernanke Burning The Buck (toning down tapering expectations). Every one of the aforementioned constituencies disagrees with me on that – but I’m betting 99% of The People in this country would call my #StrongDollar America the pleasure they seek.


Now, if only the US government explained it to them like we do, without all the conflicts of interest…


Our immediate-term Risk Ranges are now:


UST10yr 2.49-2.75%


Shanghai Comp 1

USD 82.12-83.61 (bullish)

Brent Oil 107.61-110.13

Copper 3.05-3.19


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Pain's Delusion - COPPER vs CAT


Pain's Delusion - vp 7 17

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