RCL has a much different take on their recent quarter than investors did. While we are much more concerned than mgmt with next year's supply increases, they may have a point regarding 2009.



Corporate was surprised and frustrated by the investor reaction to the call.  Given the low share count, small movements in the bottom line heavily impact their EPS.

  • Fuel negatively impacted guidance by 5 cents, post 6/29 guidance, however, it has now swung the other way and should benefit them by 5 cents
  • The other 5 cents was related to 13 Pullmantur members getting swine flu (post guidance) which caused a last minute cancellation and bad press which negatively impacted bookings from Spain to the Caribbean in the following weeks

Given that overall business conditions were steady to slightly improving (although this wasn’t really reflected in yield guidance for the balance of 2009), and given the positive guidance on yield growth in 2010, management actually thought the stock price would react positively.



Business Environment:


  • They still feel very strongly that the business environment is stabilizing to slightly improving
  • Given that 85-90% of the business in 2009 is already booked, the “positive” trends they are seeing may not be reflected in yields for the balance of the year, such as the slightly upward bias on close in bookings
  • FX should have a mildly positive impact for the balance of the year since deposits on international cruises will translate into more dollars once those revenues get recognized.
  • RCL locked in some commodity and food costs for next year - close to the lows. They claim that they will benefit even if there is some reflation in these costs
  • Visibility has remained at four to four-and-a-half months out (on average); however, the shorter and cheaper weekend getaway product has less visibility, typically booking approximately two months out.
  • They believe that the “high beta” nature of their stock will help them the next few quarters
  • Onboard spend is trending in the same pattern as shipping. Mix shift in onboard spend has been away from materials (retail & art auctions) towards experiences like shore excursions/etc.



New Supply:


For 2010, the new hardware is performing “extremely well” which is why they are expecting moderate yield growth.  For a third of the business that was on the books for 1Q2010 the pricing was better than where they ended 1Q2009.  However, given the large amount of availability for 1Q2010 and the “closer in” nature of bookings, there won’t be a whole lot of confidence in “guidance” until the 3Q09 call when at least 50% of business should be booked. 


Why are they not concerned about the supply growth?

  • The net supply increases will impact Europe (new ships to the saturated North American market, older ships moved in to Europe).  Management believes Europe is very underpenetrated, has a lot of organic growth left, and can absorb the new supply.
  • New supply is being absorbed by first time European cruisers
  • Most of the new ships are going to North America, and there is a segment of the cruise population that likes to say they’ve been on the latest and greatest ship.  Ships that are a few years old are then moved to Europe – and while they aren’t brand new, they are still “fresh” compared to what’s currently out there.





  • Fuel hedges in 2010 – in the low 60’s per barrel range and remaining at the same level for 2011
  • Around 420’s range per metric ton


Gas prices have been extremely favorable on a YOY basis for restaurant companies this year.  During the first half of the year, gas prices were down 38% on average.  This YOY favorability has continued in 3Q, but gas prices have moved higher in the last month, up about 7%.  Looking at the chart below, this YOY cost benefit will start to moderate and could go away in the fourth quarter.  Gas prices typically decline after the peak summer driving season, but are not likely to decline as dramatically as they did from last summer’s historically high prices. 




From a restaurant demand perspective, consumers do not typically think in YOY terms.  Gas prices are up 7% in the last month and 14% in the last three months.  This will put increased pressure on consumers’ wallets and impact their decisions about eating out. 


To that end, we have seen this being played out in the most recent restaurant industry sales data released by Malcolm Knapp.  For the past 5 months we have seen a sequential decline in same-store sales trends for the Full Service restaurant companies. 


I would also note that a key Research Edge MACRO theme is the Q4 REFLATION ROTATION theme, where reported inflation will begin to show up in Q4.  Helping to contribute to that theory will be the price of gas consumers are paying by November.  Currently the national average for a gallon of gas is $2.64 relative to $2.65 on October 27, 2008 and $2.40 by November 3, 2008.      

No Crash Here: SP500 Levels, Refreshed...

So far, today’s intraday high in the SP500 is 990. Please forward that print to all the crash callers out there –  the 990 level in the SP500 is -2.2% off the 2009 YTD high, +9.6% higher than the 2008 year end close, and +46.4% higher than the capitulation closing low of March 9th.


The last 2-days of selling are what we simpleton macro folks call a correction, not a crash…


Calling crashes is, presumably, a behavioral response by the manic media and group-thinkers alike who missed calling the 2007-2008 US market crash. It is sad and it is silly, but don’t get upset about it – capitalize on it. Provided that the US Dollar remains broken across all durations, stay with the global macro program that’s worked since March. Buy red on US Dollar up days; sell green on US Dollar down days; rinse and repeat.


I have been, on balance, selling strength today. As is customarily my problem, I am sure I am making some sales too early. That’s my problem, not yours. Immediate term TRADE lines of resistance are at 999 and 1020 (dotted red lines). A close below 999 today puts immediate term downside TRADE support in play at 979. A close above 999, combined with a Burning Buck and the kind of global macro data we received out of Hong Kong and Germany today, and you’ll see another higher-YTD-high to sell into.




Keith R. McCullough
Chief Executive Officer


No Crash Here: SP500 Levels, Refreshed...  - a1


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CKR reported period 7 and fiscal 2Q 2010 same-store sales results this morning.  Carl’s Jr. has struggled recently and reported period 7 comparable sales of -5.2%, representing 2-year average trends that were about even with the prior period.  On a quarterly basis, CKR’s top-line trends slowed on a sequential basis at both its Carl’s Jr. and Hardee’s concepts, as seen in the charts below. 






Judging by how CKR is trading up today, investors seem to be comforted by the fact that the company is guiding to 2Q restaurant level margins of 19.1%-19.4%, about even with last year’s 19.3% number.  This is impressive relative to the significant fall off in same-store sales growth, but as I keep saying, this is not a sustainable trend.  The company will not be able to maintain these margins if same-store sales continue to decline. 




Carl’s Jr. has recently underperformed its QSR peers, largely as a result of its more premium priced menu, which has failed to drive traffic in this tough economic environment.  Making things even more difficult for Carl’s Jr., MCD rolled out its new Angus burger in early July.  Although the timing is not right for another premium-priced QSR product, I have said that MCD’s new Angus product would put increased pressure on Carl’s Jr.’s sales as MCD is a formidable competitor with a large advertising budget.  MCD has not yet launched a national advertising campaign around its Angus burger, but we have seen coupons like the one below.




To that end, today, in a separate press release, CKR warns Carl’s Jr. and Hardee’s “consumers not to fall for the McHype.”  The entire press release is focused on McDonald’s new Angus offering.  “The Original Six Dollar Burger at Carl’s Jr. has 24 percent more meat than McDonald’s Third Pounders, yet costs the same - $3.99.  And at Hardee’s, the 100% Black Angus beef Original Thickburger has just as much meat as McDonald’s Angus burger, but costs 60 cents less. Those are the facts and that’s the value of our burgers.”  CKR is even offering a money-back guarantee beginning in mid-September that will give customers a refund if they don’t agree that CKR’s burgers are better than MCD’s Angus burgers. 


The fact that CKR is making such a big deal about MCD’s Angus burger makes me believe that the company is feeling increased pressure from this new product.  CKR also stated that it will be introducing a new product tomorrow at its Carl’s Jr. restaurants, The Big Carl, which it calls a counterpunch to MCD’s iconic burger, the Big Mac.  It is one thing to go after a competitor, but it is another to go after that competitor by name, particularly when that competitor is McDonald’s.  MCD can and will beat CKR at the advertising game if it so chooses.  In the near-term, CKR may get some attention from its mudslinging tactics as everyone enjoys a good corporate battle!  And, the money-back guarantee may increase trial at Carl's Jr., but in the end, MCD will likely win the battle as you can never underestimate the company's marketing muscle.




Pop, Pop, Bang! German Sentiment Popping

Research Edge Position: Long Germany (EWG)


The ZEW Center for European Economic Research reported today that its August index of Investor and Analyst Expectations rose to 56.1 from a pullback in July to 39.5. This increase for the index, which aims to predict economic health six months ahead, is bolstered by ZEW’s gauge of the Current Economic Situation, which rose to -77.2 from -89.3 in July. (See Chart Below)


The data supports our bullish fundamental outlook on Germany. We believe that Germany’s recent CPI and PPI figures represent a healthy (short term) deflationary environment that benefits both consumers and producers due to the purchasing power associated with imported commodity price declines (bolstered by a strengthening Euro); particularly  cheaper energy costs.  Interestingly, today’s CPI data from the UK for July registered unchanged at  +1.8% Y/Y  -a sequential divergence from Germany’s consumer deflation, which, along with the Eurozone average, stands at -0.7% annually. Our bearish outlook on the UK remains as we believe inflation is getting ahead of growth.


The recent German Q2 GDP release at 0.3% Q/Q has certainly helped to improve sentiment, as the public begins to believe that the recession is passing (or at least that the worst is behind them). Although all economic data is ultimately rear-view, with both Germany and France exiting recession from a technical level, look for countries across the EU to benefit from increased demand and confidence from consumers in the Eurozone’s largest economies. 


Matthew Hedrick



Pop, Pop, Bang! German Sentiment Popping - a1


Chart of The Day: Deflation's Daddy

On the heels of last week’s deflationary US Consumer Price report (-2.1% y/y for July), we just got one of the most deflationary Producer Price reports ever. Yes, by our math, ever, is a long time…


July’s PPI print came in at an eye opening negative -6.8% y/y.


When we talk about the dynamics of y/y price deflation in Q3 versus what we expect to see in Q4, this is the point. Most people forget that last year’s PPI compares are some of the hardest ever. Look at the 2 year snapshot of this picture, then consider it in the context of the 60 years of PPI data that Andrew Barber compiled with our macro team in the chart below.


So, there are three very important points to take away here:


  1. From a Cost of Goods Sold perspective (for some producers) Q309 Earnings are going to be even more impressive than Q209
  2. Deflating costs at a faster pace than y/y revenue growth = economic leverage
  3. This all ends mid-September


Why mid-September? That’s when you are going to get the August PPI report, and that should mark the low in deflationary reports. From there, you’ll see what we have coined Reflation’s Rotation into Q4. This simply means y/y Q3 price deflation will morph into y/y Q4 price inflation.


If you’re short this market right here – you’re short a lot of things that I wouldn’t be short until September. Duration mismatch (thesis versus timing) is really dangerous for a short seller – take it from a short seller who has learned this lesson the hard way.


Deflation is Bernanke’s Daddy. Until Daddy’s music stops, Bernanke will keep hearing the voices of a Depression. Until that stops, he won’t signal a rate hike. Until he signals a rate hike, the Reflation trade will live on…



Keith R. McCullough
Chief Executive Officer


Chart of The Day: Deflation's Daddy  - a1


Daily Trading Ranges

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