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Stories on Hedgeye Radar Screen

Takeaway: Here's a quick look at some stories we're reading today.

Keith McCullough – CEO

Fisher Says White House Botched Fed Chairman Succession (via Bloomberg)

US consumer confidence dips (via Yahoo Finance)

Facebook, other banned sites to be open in China free trade zone (via Reuters)

Ex-FBI agent pleads guilty in national security leak (via BBC)


Stories on Hedgeye Radar Screen - sum1


Daryl Jones – Macro

Post Fed Hangover (via Bespoke)


Josh Steiner - Financials

Trader Lost $4M in Romney Bets (via NY Post)


Jonathan Casteleyn – Financials

Gundlach to Manage $450 Million for Prudential’s Jackson (via Bloomberg)

Applied Materials to Buy Tokyo Electron for $9.39 Billion (via Bloomberg)


Kevin Kaiser – Energy

Exclusive: Gulfport Energy ex-chairman received millions in free equity (via Reuters)

National Oilwell Varco (NOV) to Spin-Off Distribution Business (via StreetInsider)


Howard Penney – Restaurants

SEC Doesn't Like Noodles' 'Guests' (via Restaurant Finance Monitor)


Brian McGough – Retail

U.S. Retailers’ Holiday Hiring Seen Falling 6.9% (via Bloomberg)

Abercrombie & Fitch pays out $71,000 to settle lawsuits over hijabs (via The Guardian)

Kravis pushing to buy Jones Group (via NY Post)


In preparation for CCL FQ3 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • WORSE:  While the quarter was a little better than expected, the outlook was disappointing.  1H 2014 yield guidance was substantially lower than what the Street was expecting as was Q4 EPS and yield guidance.  We continue to believe the ramifications from a tarnished Carnival brand have been underestimated.




  • WORSE:  North American brands' (ex Carnival) bookings volume for the next 3 quarters has been flat at higher prices in the last 12 weeks.
  • PREVIOUSLY:  "Fleet-wide bookings during the last 11 weeks from the end of March covering the next three quarters are running higher year-over-year at higher prices."
    • "North American brands' bookings and pricing during this 11-week period are higher."
      • "Caribbean itinerary booking volumes in the last 11 weeks covering the next three quarters, are slightly lower year-over-year at slightly higher prices."
      • "Alaska bookings, again excluding Carnival, are significantly higher at lower prices."
      • "European itinerary bookings for North America brands, are slightly lower at nicely higher prices."
    • "EAA brands' bookings and pricing are also higher versus the prior year."
      • "European itinerary booking volumes, and that's approximately 50% of EAA capacity, are significantly higher at higher prices."
      • "Caribbean itinerary volumes for EAA brands, which are just under 10% of EAA capacity, are running behind last year, but also at nicely higher prices."


  • WORSE:  While management states that the Carnival brand continues to recover, F4Q pricing declines are now trending in the double digits while 1H 2014 yield guidance was a bomb mainly due to Carnival - suggesting little improvement.
    • "Bookings and pricing over the last 11 weeks are both lower year-over-year in a high single-digits low double-digits range respectively." 
    • "On recent surveys, consumer perception of the brand has significantly improved since the incidents back in March, and we expect this trend to continue as confidence builds back in the brand. We will need to cycle through a full year before we begin to see positive pricing comparisons, which should begin in the second half of 2014."


  • WORSE:  Lower than expected yields due to 'geopolitical events in the Eastern Med'.  Occupancy and pricing dropped across most ships.
    • "On a fleet-wide basis, excluding Carnival, cumulative occupancies are slightly lower at slightly lower pricing."
    • "For North American brands, excluding Carnival again, occupancies are lower at higher prices."
      • "Carnival Cruise Lines' occupancies for the fourth quarter are also lower at slightly higher prices."
    • "For EAA brands, occupancies are flattish year-over-year at lower prices."
      • "Costa brand occupancies for the fourth quarter are nicely higher at lower prices...This is the first time during the last several quarters that Costa has been ahead of the closer-in booking curve this early in the booking process. We read this as a very positive sign are expecting Costa to have a nice increase in revenue yields in the fourth quarter."

1Q 2014 TRENDS

  • WORSE:  Ex-Carnival brands are not offsetting the bleeding from the Carnival brand by much, as revenue yield change for 1H 2014 is expected to be in the low single-digit decrease, similar to 2H 2013.
  • PREVIOUSLY:  "On a fleet-wide basis, and this includes Carnival, occupancies are lower year-over-year at higher prices. North American brands' occupancies, again including Carnival, are lower year-over-year at nicely higher prices. EAA brands' occupancies are also lower at slightly higher prices."


  • MIXED:  CCL expects Costa's performance to strengthen over 2013 and throughout 2014.  Brand perception improved in Italy and France but political uncertainties continue to pressure the European markets.
    • "A major challenge in Europe right now is the weakened economies, especially in Italy and Spain."
    • "Northern Europe product did have a significant capacity increase this year relative to the Med, and we do not expect that to recur in 2014."


  • SAME:  Carnival expects NCC ex fuel/impairments to be roughly similar to that seen in 2H 2013.  There will be more marketing activity, ship investments and onboard products such as food and entertainment.  Dry dock costs will be higher due to vessel enhancements. 
    • "So beginning in the second half of the year, we are planning to increase marketing spend across all North American brands and expect this to continue into 2014."
    • "We had talked about the vessel enhancements being a multiple year process. So there will be some of that in 2014 as well."

Germany Bullish on Merkel’s Win: DAX Levels Refreshed

  • Bullish on Merkel’s Win, Coalition with the SPD likely
  • DAX is in a bullish breakout across its immediate term TRADE and intermediate term TREND durations
  • IFO German  Business Confidence pushes higher in September reading
  • EUR/USD strong on The Bernank No Taper Trade

Sunday ushered in a huge win for Chancellor Merkel, receiving a convincing 41.5% of the votes (5 seats short of an absolute majority in the Bundestag), while her former coalition partner, the Free Democrats (FDP), were bounced out of parliament having received less than the 5% minimum to retain their seats. The results portend a very likely alliance between Merkel’s CDU/CSU and the Social Democrats (SPD). For reference, this coalition, named the grand coalition, and last seen in 2005-2009, took 65 days to firm up back in 2005. How long will it take this time around?


Germany Bullish on Merkel’s Win: DAX Levels Refreshed - zz. poll


It’s tough to pin down just how negotiations will flow. Merkel has said that she hasn’t ruled out a coalition with the Greens, the party with the fourth biggest showing. However, we think a coalition with the Greens is unlikely, and may well just be a bargaining chip to play against a very likely coalition with the SPD.  We do expect a heavy level of political jockeying in the coming days and weeks as both sides look to secure key ministerial positions.


The SPD remains a party that has largely backed Merkel’s initiatives on EU and Eurozone policy, including the multiple bailout programs: we think the market will be bullish on this continuity.  Further, we would not expect this stance to change within a grand coalition.  Finally, we expect negotiations between to the parties to center more on domestic issues; the SPD may push for a national minimum wage and higher taxes on the wealthy, both of which have been opposed by Merkel.


Bullish DAX

As the politicking runs its course, we are bullish on the German equity market, a position we’ve held for much of the year.  As Keith said today on the morning call:


 “Respect is earned, not allocated. Over in Germany, Angela Merkel doesn’t have a bunch of Fed heads running around like chickens with their heads cut off making conflicting speeches to manic media people now does she? The DAX “correction” looked nothing like that in the S&P 500. Both DAX, the FTSE and Nikkei are all looking better now than S&P 500. Why not buy them instead?”


Below we highlight our key durations on the DAX that are screening a bullish breakout:


Germany Bullish on Merkel’s Win: DAX Levels Refreshed - zz. dax


German Data Grinds Higher

Below we show the IFO German Business Confidence survey. While it is but one of many surveys and data points we track, the 6-month forward Expectations figure beat consensus estimates and rose month-over-month to 104.2 versus 103.3 in August.  The positive data point is reflective of the grind higher in German data over the last 3-6 months. We maintain our bullish bias on German equities.


Germany Bullish on Merkel’s Win: DAX Levels Refreshed - zz. IFO


EUR/USD  Levels (Refreshed)

On what we shall call The Bernank No Taper Trade, the EUR/USD levels are grinding higher. Our topside trade resistance is now $1.36.


Germany Bullish on Merkel’s Win: DAX Levels Refreshed - zz. eur usd

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Carnival confirmed pricing weakness suggested by our pricing survey last week.  The surprise was the release of FY2014 yield guidance early.



"During the past few months, Carnival Cruise Lines has seen a steady improvement in brand perception among U.S. consumers based on national market research data.  While some of our current challenges and cost pressures will continue well into next year, we have tremendous opportunities to enhance shareholder value over time. I have spent my initial months gaining a much deeper understanding of our people and our operations" 



  • Impairments:  from 2 small Costa ships (one will be serviced Nov 2014), $27MM Ibero trademark
  • Accounting changes:  net cruise costs and earnings will now exclude gains/losses on ship sales and impairment charges 
  • 3Q:  
    • Fleetwide capacity:  +3.4%
      • NA:  +4%,  EAA brands: +2.5%; 
    • Ticket yield: -4.6% (NA: -5.4%, EAA: -3.0% (Northern Europe declines offset by Costa and P&O Australia)
    • Onboard yield & other:  -1% (EAA slight increase offset by NA declines)
  • 4Q:  NCC ex fuel (+4%) - low end of previous guidance
  • 2014 cost guidance:  NCC ex fuel similar to 2013 (This increase is driven by more marketing activity, investments and onboard products such as food and entertainment, hiring dry dock costs including vessel enhancements and various other costs and inflation partially offset by ongoing efforts to reduce costs).
  • (Ex Carnival brand): 
    • Covering next 3 Qs, bookings volume last 12 wks:  unchanged YoY (at higher prices)
      • NA:  higher bookings at lower prices
      • EAA:  bookings are lower at nicely higher prices
  • Carnival brand
    • Last 6 wks, bookings improving; expect prices to gradually improve over long-term
  • 4Q
    • Fleetwide (ex Carnival): occu lower, same pricing
      • NA:  occu slightly lower, slightly lower pricing
      • Carnival:  occu lower, lower pricing
      • EAA:  occu lower at slightly higher pricing
    • Yield:
      • NA ex Carnival:  down slightly
      • Carnival:  lower double-digit
      • EAA:  higher
  • 1Q 2014
    • Fleetwide: higher pricing at lower bookings
      • NA ex Carnival:  higher pricing, lower occu
      • Carnival:  lower pricing, lower occu
      • EAA:  flat pricing, lower occu
  • 1H 2014
    • Fleetwide:  pricing higher, lower occu
    • Revenue yields: low single-digit decrease similar to 2H 2013
      • NA:  lower 
      • EAA:  higher
      • Expecting yields to be higher in 2H 2014
  • Carnival perception improving faster than expected; began fall marketing program with advertising campaign yesterday
    • Carnival changes:  
      • More in-house travel - in-house call center agents new bonus commission plans, providing complimentary cabins and a variety of other changes to make it easier for travel agents to book Carnival.
      • A new and simplified cabin pricing plan also to make it easier to book Carnival is expected to be announced shortly. The response to these changes by travel agents has been very positive
    • Expect higher pricing 2H 2014
    • Recent strategy:  holding prices even at slightly lower occu
  • Costa Concordia:  take to scrapyard next spring
  • Expect Costa's performance to strengthen over 2013 and throughout 2014
    • Brand perception improved in Italy and France
  • Asia:  2 Costa in China/Southeast Asia markets, 1 Princess ship; 2 ships in Japan during Spring/Summer
  • Expected Holland America/Princess to have solid performance in 2014; Seabourn performing extremely well

Q & A

  • Wanted to give 1H 2014 guidance because "people didn't understand what is happening in the business"
    • Mainly Carnival driven; positive yields on EAA side
    • Sees Carnival not down as much and Costa not up as much
  • Quite a few dry docks in 2014 (longer in length because of vessel enchancements); more agent support costs in 2014
  • Costa:  3Q mostly occu driven recovery;  4Q:  mix of occu and pricing
  • Would not comment on NA yields ex Carnival in 1H 2014
  • Process of selling 2 Costa ships:  intention to sell off older, small, less efficient ships at very low prices given weakness in market; has already written down one of them
    • Carnival didn't build these ships; they came through acquisitions
  • Upcoming cost savings through centralization of resources?
    • Too early to say, will know in upcoming board meetings
  • Carnival:  early stages of recovery; continuing improvements in occupancy since they fell way behind earlier
  • Most people who have cruised extensively continue to cruise; not much brand overlap among repeat cruisers as people may think
  • Pressure is on 1st time cruisers
  • Carnival's hold pricing may last 1-2 quarters
  • Impact from big increase in Caribbean capacity in 2014?  No visibility at this time.
  • Carnival improvement in pricing for Q3, Q4, and Q1?  Hard to say.
  • Challenge in 1Q:  large increase in Caribbean capacity
  • % booked:  4Q: 85-95%, 1Q:  50-70%,  2Q:  30-50%
  • Have increased level of advertising for F4Q
  • Too early to say how much of the expected cost increases are permanent
  • Q1 2014 will likely be worse than Q2 2014

Neutral: SP500 Levels, Refreshed

Takeaway: Why buy a market that was overbought for the wrong reasons (Fed randomly devaluing the Dollar) when it’s not yet oversold?



I don’t know about you, but ever since Bernanke moved the goal posts again, I have no idea what to do. Whenever that happens, I take down both my gross and net exposure.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE overbought = 1725
  2. Immediate-term TRADE support = 1682
  3. Intermediate-term TREND support = 1655


In other words, why buy a market that was overbought for the wrong reasons (Fed randomly devaluing the Dollar) when it’s not yet oversold? You could have bought all your wanted with the SP500 at 1630 in AUG – and we did.


Not here – not now. No thanks, Ben.



Keith R. McCullough
Chief Executive Officer


Neutral: SP500 Levels, Refreshed - SPX

A Breakdown of Staples & #RatesRising

#RatesRising has been one of the most important 2013 themes our macro team has written on at Hedgeye. The implications for the Consumer Staples sector are significant as the evidence suggests that yield-starved investors may have sought refuge in the ample yield offered by consumer staples stocks during the 2009-2012 period. Here we detail our thoughts on the space following last week’s surprise announcement and our view on individual names.


Summary:  We continue to favor stocks with strong fundamentals, organic sales growth and strong cash flow, over slower-growth, high yielding stocks. Despite the “no taper” decision from the Fed last week, we believe 2009-2012 yield-chasing capital will continue to flow out of staples with poor fundamental outlooks, even if “attractive” yields perpetuate favorable sell-side sentiment.

  • Highest inverse correlation between the 10-year yield and staples price action over the last 6 months:PM, KO, KMB
  • Food processors are more strongly driven by corn, #RatesRising a good thing (strong $)
  • We like LO, BNNY, SAM, EL, CL on the long side
  • We are bearish on KO, DPS, ENR and KMB

A Breakdown of Staples & #RatesRising - staples vs 10yr


A Breakdown of Staples & #RatesRising - inverse correlations



A Topic du Jour: As the chart below illustrates, the prospect of the Federal Reserve lightening the pressure on the accelerator has garnered increasing levels of attention from the markets since the second quarter. Last week’s surprise move by the Federal Reserve to delay a tapering of its bond purchases certainly registered with investors in the consumer staples sector. The “no taper” announcement spurred a significant one-day move in all equities, particularly those that had underperformed as the expectation of rates rising grew.


While we recognize the change in the Federal Reserve’s tone, the shadow of “tapering” could continue to weigh on certain names within the sector, particularly if the economic (employment) data continues to support a tightening of the QE spigot.


A Breakdown of Staples & #RatesRising - 10 yr levels


A Breakdown of Staples & #RatesRising - tapering sectors



The Intermediate-Term TREND Has Been Dominated by “Rates Rising”: We’ve shown the chart below in earlier notes, but it is worth highlighting again. During 2009-2012, the data suggested that many investors sought out staples and other dividend-yielding, stable, sectors for a reliable yield. This would suggest that much of the capital flowing into staples may have been more focused on yield than fundamentals, which then resulted in some capital exiting the group as expectations increased that the Fed would taper. Indeed, on a stock-by-stock basis, it seems that some performance has been inversely related to dividend yield over the past six months, with the exception of sentiment-driven groups like the Food Processors where, with a strengthening of the dollar pushing corn prices lower, the result can coincide with stronger profit margins.

Below, we highlight the sectors of the S&P 500 and their performance relative to each other. We also break out the subsectors of the Consumer Staples sector and highlight their respective price actions relative to the average S&P 500 sector.


A Breakdown of Staples & #RatesRising - XLP vs 10 yr yield



Food, Food Processing, & Tobacco: The correlation between Food Processing stocks and the 10-year yield, overall, has been positive over the last six months as the corresponding strength in the U.S. dollar offered respite from the margin pressure associated with high corn prices that had weighed on SAFM, TSN, and several others in the space. Within the food space, BNNY remains a favorite on the long side. We expect investors to continue to pay up for the outperformance of the organic players. BNNY is showing strong penetration into the mainstream aisle and we believe its new product roll-outs in frozen meals (as frozen pizza gets back on track), alongside continued strength of mac & cheese, and crackers and fruit snacks should allow the company to meet its FY sales guidance of 18-20% and EPS range of $0.97 to $1.01. Its skew to a higher income client should maintain these results despite any swings in the macroeconomic landscape that could come into year-end.


Tobacco stocks' performance has largely reflected weakening volume trends that have only been partially offset by pricing. We continue to like Lorillard’s (LO) portfolio of full-flavored offerings and dominate share in menthol, yet a concern remains around any update the FDA may give on menthols. There’s been much excitement around the e-cigarette category. LO’s Blu e-cig remains the market share leader and, while its sales are around 1% of the portfolio, we see strong category excitement outweighing the contribution that e-cigs are adding to earnings. 



Beverages & Alcohol: Beverage consumption of carbonated soft drinks continues to suffer due to shifting health and wellness trends, with KO and DPS two names on our short list. The category has been hit by volume pressure and “unfavorable weather” in recent quarters.  We largely remain on the sidelines, given the lack of excitement. Alcohol has held up better than most of its peer categories over the last 6 months and on the beer side our theme remains the outperformance of the craft segment. SAM’s price performance has been an absolute rocket ship and we expect its decision last quarter to invest in its growth to be effective.



Home Products: The stocks that performed the worst under the “tapering” scenario of the last 6 months were those with the highest yield and the weakest fundamentals. KMB is the standout, in this regard, as the bull case became increasingly dependent on cost savings and share repurchase-driven earnings growth in an environment where investors were less willing to pay a premium multiple for yield  with little organic growth. Other names within the space, like CL, that are posting strong organic growth numbers and face a relatively benign cost environment, are more attractive than KMB on the long side.


We remain bearish on KMB as, despite the extension of QE as we know it, we believe it is unlikely that the Staples investing environment will revert to that which typified the 2009-2012 period, when it seems fundamentals were of lesser importance than the stability of the respective yields of consumer staples stocks relative to the concurrent decline in treasury yields. The fundamental outlook for KMB suggests further downside to earnings expectations.



Personal Care: Our view of stocks within this sector is less sensitive to interest rates, as companies like EL are growing earnings at a high-double digit rate with investors holding the stock for growth and not yield. Companies like EL, with ample opportunity in developed and emerging markets, with exposure to the high-end consumer, are attractive to us on the long side.


We remain bearish on ENR as the company continues to struggle versus larger players in the promotion-driven men’s razors category. As with KMB, the ENR bull case hinges on cost savings and potential upside in the earnings multiple; while we expect the company to meet earnings expectations this year, we believe a continuing preference of growth over yield makes a meaningful multiple expansion from here unlikely over the intermediate-term TREND (3-6 months).



Matthew Hedrick

Senior Analyst


Rory Green

Senior Analyst


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