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March 6, 2014

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Price-Fixing Crisis

This note was originally published at 8am on February 20, 2014 for Hedgeye subscribers.

“Government policy is the primary cause of the financial crisis.”

-John Allison


That’s “fundamental theme” #1 in one of the most important post 2008 market crisis books – Chairman (and former longstanding CEO of BB&T Bank), John Allison’s The Financial Crisis and The Free Market Cure.


As I was taking a few pseudo vaca days with my kids (if you own a small business in America, there are no bailouts – no real vacations either – and real capitalists like that), I was struck by the simplicity of what hasn’t changed in this country – government price fixing.


Price-Fixing Crisis - go2


Yep, that’s what Allison and anyone who has studied economic #history calls it too (plenty of big time capitalists like Charles Koch agree). That’s what “forward rate guidance” by the Fed really is; it’s also what Presidential executive orders on minimum wage hikes and Policies to Inflate via currency devaluation are. Inflation is an un-elected tax that politicians aren’t accountable to. That’s why they cheer it on.


Back to the Global Macro Grind


Who needs to cheer for Latvia’s hockey team when you can wake up in America watching the Treasury Secretary (Jack Lew) whine about taxes (consumer price inflation) on European consumers being “too low.” Heck, the descendent of Geithner and Wesley Mouch is egging on the Japanese to burn its currency at the stake too.


Not to be outdone, the Congressional Budget Office is now analyzing what Obama thinks is his only way out of the tax he and Bush had the Bernanke impose on America’s poor (Down Dollar, Food/Energy Inflation) – wage inflation. My brother runs a McDonald’s franchise – ask him how many new stores he’ll be interested in opening if food costs rip and his “poor” employees cost him 10-20% more…


In other central planning news, Venezuela is “expelling” US diplomats this morning for “undermining the government.” Evidently some of these Americans aren’t yet socialist enough. Argentina and Venezuela are realizing the other side of currency devaluation, debt-rising, and #InflationAccelerating this morning – it’s called social unrest.


#InflationAccelerating? Who the heck does this Canadian think he is making that call without the government’s approval?

  1. US Dollar is down again this morning = down for 3 consecutive weeks, and now negative for 2014 YTD
  2. CRB Commodities Index (19 commodities) was up another +1.1% yesterday to a fresh 52-wk high of 302 (+7.9% YTD)
  3. Natural Gas is up (again!) this morning to $6.20 = +46.7% YTD (they don’t have heat or air conditioning in Washington)

I know, I know. It’s all the weather. Wages, Rents, Schooling – Facebook paying $16B for “WhatsApp”, Candy Crush going public – all of it!


But, but, the US stock market (SP500) is only down -1.1% YTD. And:

  1. Slow-growth Gold is +9.3% YTD
  2. Slow-growth-yield-chasing Utilities (XLU) are +5.9% YTD
  3. Lever-yourself-up-long Real Estate (REITS) are +7.5% YTD

Yep. As #InflationAccelerates, 71% of the US economy (consumption) gets A) taxed and B) slows:

  1. US Consumer Discretionary Stocks (XLY) are -3.2% YTD
  2. Consumer Staples Stocks (XLP) are -3.4% YTD
  3. Financials (XLF) are -2.2% YTD

But, don’t worry about it – when the weather improves, it’s all coming back – all of it.


Wait a minute. Will the spring in the Northeast change US monetary and fiscal policy? Or, as the economy slows, will Lew and Yellen quintuple down on the Down Dollar, Down Rates, House Flipping American Dream?


How’s that working out for Barney Frank and Ben Bernanke btw? US Mortgage Purchase Applications were down another -6% last week (after being down -5% in the week prior), testing post 2008 crisis lows. Imagine that, as the purchasing power of Americans falls alongside interest and savings rates, there are less lemmings this time who are going to join Than Merrill’s “Flip This House!”


John Allison’s book is a Top-10 on my shelf because he explains the basics of economics that we attempt to articulate each and every risk management morning. Two more of his “Fundamental Themes” are:

  1. “Government policy created a bubble in residential real estate”
  2. “Almost every government action taken since the crisis started (even those that may help in the short-term) will reduce the standard of living in the long-term”



And sometimes the short-term morphs into the long-term a lot faster than consensus government policy apologists think…


Our immediate-term Macro Risk Ranges are now:


SPX 1809-1848

Nikkei 14083-14992

VIX 12.76-16.99

USD 79.82-80.51

Natural Gas 5.34-6.22

Gold 1291-1336


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Price-Fixing Crisis - Chart of the Day


Price-Fixing Crisis - Virtual Portfolio


Last night, Malcolm Knapp released sales results for February, estimating that same-restaurant sales and guest counts declined -1.5% and -4%, respectively, versus February 2013.  On a two-year basis, same-restaurant sales and guest counts declined -3.5% and -5.2%, respectively. 


February also marked a period of sequential deterioration.  The results imply a sequential deceleration of 13 bps and 119 bps for same-restaurant sales and guest counts, respectively.  On a two-year average basis, the results imply a sequential deceleration of 200 bps and 200 bps for same-restaurant sales and guest counts, respectively.


Knapp noted that only one of four weeks in February had positive same-restaurant sales and guest counts. Weather continued to be widespread and fluctuating issue during the month, particularly hitting the first week hard.  Parts of the East Coast and Midwest once again fell victim to the harsh weather.


We will release more data when Black Box Intelligence reports, including any revisions to company specific 1Q14 same-restaurant sales estimates in February.



Howard Penney

Managing Director


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Setting up for Q1 beat but FY2014 guidance better than we thought. Japan?




  • Wholly-owned business performed in-line in 2013
  • Relaunched Penny Lane at 4 LV properties in November
  • Penny Lane now in place at 12 BYD properties; seeing better response by Penny Lane
  • Earliest debt maturity is 2018
  • Open to more acquisitions
  • Wilton Rancheria:  early stage design work under way 
  • Interested in Japan
  • Online gaming:  Borgata has 1/3% of market
  • Discontinuing quarterly guidance for Borgata
  • October- mid Nov: strong trends
  • Casual players visitation declined outside of Nevada
  • Top-tier players doing well
  • LV Locals
    • reduced marketing spend by $2MM.  Improved operating margins by 120bps.  Non-gaming promising area of growth
  • Downtown
    • Hawaiian charter service running much more efficiently
    • Optimistic on Downtown business in 2014
  • Midwest & South
    • $9.3MM one-time property tax adjustment at Blue Chip
    • Winter weather has been a record
    • Severe weather reduced EBITDA by $3MM
    • Delta Downs:  notable bright spot, posted double digit EBITDA growth; annual records for EBITDA, rev, and coin-in.
  • Borgata
    • Below expectations
    • Unusally low hold in December reduced EBITDA by $3.6MM, higher property tax decreased EBITDA by ~$2.1MM in the quarter and $8.4MM for the year, and bad weather impacted EBITDA by $1MM
    • Borgata/PartyPoker:  43% share of I-gaming, 85% of online players have not had rated play in the last 2 years
    • Significant uptick in promotional spending, although Borgata have not matched the increase
    • In Feb, launched online/mobile platforms for 1st 3G/4G devices
  • December:  redeemed $950MM 2015 note
  • Peninsula has expanded FCF by $100MM
  • $1.1 bn tax loss carryforward (couple of dollars per share)
  • Cash:  $268MM at Boyd, $27MM Peninsula, $17MM Borgata
  • Boyd senior leverage:  4.2x (covenant 5.0x)
  • Boyd total leverage:  6.5x (covenant 8.5x)
  • Peninsula leverage:  6.3x (coventnat 7.0x)
  • Borgata's covenant EBITDA was $121.8MM compared to acquired minimum level of $110MM
  • 2014 maintenance capex:  $125MM ($15MM Peninsula, $25MM Borgata)
  • Final Phase of Kansas Star will cost $20MM
  • 2014 guidance
    • Total D&A:  $255-$260MM (Boyd:  $130MM, Peninsula $72MM, Borgata $55MM)
    • Total interest expense:  $300MM (Boyd: $155MM, Peninsual $75MM, Borgata $70MM)
    • Deferred Rent:  $4MM
    • Pre-opening:  $5MM
    • Share-based compensation:  $16MM
    • Shares outstanding:  110MM
    • Do not expect weather to be an issue going forward.  $8MM in quarterly and annual impact
    • Expect LV Locals rev and EBITDA growth to be similar to that in 2013
    • Downtown Locals: minimal EBITDA growth
    • Midwest/South expect growth in 2H 2014
    • Borgata EBITDA similar to 2013 - does not include I-gaming or lower property taxes
    • Corporate expense:  $55MM  

Q & A

  • LV Locals why flat revenue despite market up?  False positive in December #s.  No major change in direction or slope of LV market.  Have to look at Jan/Dec together.
  • Hotels have benefited from increased convention business on Strip, particularly in March
  • Midwest/South Cannibalization:  a lot of disruption from weather; lapping Shreveport competitor in June
  • NJ I-gaming:  ramping slowly but nicely
  • Bad weather will impact EBITDA by $8-10MM in 1Q 2014
  • Japan:  exploring options
  • Regional acquisitions:  fewer opportunities but looking
  • AC market :  closing of Atlantic Club had no impact on Borgata
  • Selling assets?  Open to it
  • Acquired IP in the low $30MM EBITDA; today, it is #2 in Biloxi and generating above $30MM

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CCL the positive standout in our most recent survey. NCLH still struggling a bit.



Snowstorms abating, but are consumers still booking?  In the Caribbean, we saw discounting across the board among the lower priced itineraries in the Caribbean in mid-February, but the Carnival brand pricing stood out in March, outperforming its peers.  Carnival sequential pricing picked up among the Eastern Caribbean itineraries.  More importantly, sequential pricing rose among the Western Caribbean itineraries for 2H 2014.  This is encouraging given Western Caribbean pricing has lagged.  While Caribbean pricing overall remains sluggish and pricing has been quite volatile in the busy, promotional period of Wave Season, we continue to see Carnival as best positioned due to easy comps and low Street expectations. 


Not surprisingly, the picture is starkly different in Europe.  The RC brand and Norwegian are leading the charge in a rosy booking and pricing environment.  CCL has the most exposure to Europe but it is still trying to find a solid footing there with mixed pricing performance in March.  The Ukraine-Russia situation could be a wild card.  So far, no Black Sea sailings have been rescheduled or canceled on RCL and CCL brands.  There’s speculation that Baltic Sea itineraries could eventually be impacted; that would be significant for CCL and RCL if it happens. Alaska will be the weakest market pricing wise in 2014 – who wants to go somewhere cold nowadays?


While our study focuses on sequential pricing trends and pivots, we would point out that YoY pricing for Carnival is up significantly due to the lapping of the Triumph fire incident in 2013.  RCL and NCLH face more difficult comparisons in the Caribbean.  The Street is finally catching on to the low bar set by Carnival as even the most bearish sell-side have been raising yield and EPS estimates for CCL before they report earnings in three weeks.  According to Factset, recent FY2014 estimate changes have trended around the $1.75 EPS range (at the upper end of CCL’s $1.40-$1.80 guidance).  Our $1.90 EPS and 0.3% yield forecast for FY2014 remains unchanged from our note in December “CCL: $2 ON THE HORIZON.”


Here are the highlights from our latest pricing survey (+13,500 itineraries) on March 3-4. 



  • CCL: Positive
  • RCL: Neutral
  • NCLH: Negative



  • Caribbean 
    • Carnival brand showed the greatest positive momentum in sequential pricing among the big 3 operators in March.  This is a big reversal from weaker pricing in mid-February. 
      1. Better pricing pretty much across all brand names especially Sensation and Paradise
      2. While F2Q pricing was pressured in the Western Caribbean, they may be some light at the end of the tunnel for 2H 2014 as the chart below shows
    • Princess has been busy with promotions but pricing for FQ2 itineraries have been higher.  This is offset by heavy discounting by Holland America; a recent high profile on board crime may be the cause of the discounting across all itineraries for the brand.
  • Europe
    • Costa lost a little bit of pricing power in March, although overall Summer ‘14 pricing is still solid
    • AIDA continues to be mixed.  Baltic Sea strength is offset by discounting in the Mediterranean particularly in F3Q.  This could be a potential red flag as we roll into Spring.
    • Princess pricing improved slightly, helped by Ocean Princess
    • Cunard pricing remain higher for summer ’14 while Holland America pricing plunged.
    • P&O Cruises UK pricing backed off in F2Q but remain higher in F3Q/F4Q
  • Alaska
    • Holland America sequential pricing fell slightly
    • Princess pricing recovered somewhat after heavy discounting the last couple of months
    • While a small market player, Carnival brand outperformed in pricing in the Alaska market
  • Asia
    • Princess pricing slightly higher in FQ3 and FQ4


  • Caribbean
    • Overall, RC brand pricing was flat sequentially and remain slightly lower YoY. 
      1. Close-in pricing for 1Q lost momentum in March
      2. Quantum pricing unchanged relative to February
    • Celebrity pricing remain at depressed levels.  We’re hearing good feedback for its popular 1-2-3 program.
    • Pullmantur pricing steady
  • Europe
    • Easiest the best region for the RC brand – pricing up high double-digits for F2Q and high single digits for F3Q-F4Q
    • Celebrity pricing showed sequential gains for FQ3/FQ4
    • Azamara pricing was generally positive
    • Pullmantur pricing showed decent growth considering very easy comps
  • Alaska
    • Both RC brand and Celebrity pricing were down close to double digits YoY with trend stabilizing


  • Caribbean
    • More discounting off of already low prices for F1Q-F3Q.  F4Q pricing is stable.
    • Getaway 2Q premium increased for 2Q but it’s misleading because its comp brands (Sun, Pearl, Sky, Epic) pricing fell 20% on average since February guidance while Getaway pricing declined 10%.  Getaway premiums for 4Q was steady around 26% but only flat with Epic prices
    • Breakaway 3Q premium remain in the low single digits for F3Q and ~25% for 4Q.
  • Alaska
    • Bleeding stopped in March but pricing remain modestly lower
    • NCLH has 10% and 19% exposure to Alaska in FQ2 and FQ3.
  • Europe pricing looks outstanding for the summer
  • Hawaii summer pricing stable




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