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US Housing: Reflation's Rotation

Tightening supply and ZERO rates help stoke the inflation fire for Q4…


July housing starts fell to an annualized rate of 581,000 units, from an upwardly revised 587,000 units in June and below the median expectation of 600,000 units; the July decline was due to a 13.3% drop in multi-family homes. 

(continued discussion post charts)


US Housing: Reflation's Rotation - a1


THE GOOD NEWS - The all important single family housing starts rose 1.7% in July to 490,000 units. The 14.0% gain in the Northeast was the driving force behind the growth in single family starts. 


THE BAD NEWS – There is a housing supply imbalance building.  The chart below provides a clear picture of the true supply of housing in the United States – the number of houses started minus the number of houses completed.


US Housing: Reflation's Rotation - a2


Since 1979 there are three pronounced periods where we see a real reduction in the true supply of new homes being built; 1, 1 and the current housing crisis.  While there are numerous nuances to each time period, each one was followed by a significant increase in inflation.  Intuitively it makes sense that during recessionary periods supply tightening will occur when producers overestimate demand declines, and that the resulting imbalance can create inflationary pressure (particularly if combined with low rates). In the chart below, we have mapped out this ratio against PPI. Note that historically; cycles of declining Starts to Completions have troughed at the same time that inflation has peaked prior to the current cycle.


US Housing: Reflation's Rotation - a3


The reality is that the decline in home values, low interest rates, government incentives and the increase in household formations WILL create real demand for housing units.  As a result, there is a disconnect between the perceived demand that people are not buying houses right now and the real demand, creating a “real” decline in housing supply.  At some point this will lead to future issues – INFLATION.


This is not the sole impact of housing on reflation: after all it is the substantial decline in home prices that created a tidal wave of problems for the economy and our financial system.  This has allowed the FED to keep interest rates artificially low for an extended period and helped the Government to go on a debt fueled  spending spree, killing the value of our currency.  The currency crisis will ultimately lead to imported inflation. We’ve labeled this transition period, Reflation’s Rotation (Q3 prices moving from y/y deflation to Q4 y/y inflation).


THE CONSEQUENCES – We are not just looking for another data point that will help justify our Q4 “reflation rotation” theme, but things are looking more ominous for inflation to return in Q4. 


Howard Penney

Managing Director


Andrew barber






The real estate sector in Macau has rebounded in the second quarter; real-estate transactions rose 123% quarter-over-quarter to 3,713, according to the Statistics and Census Service.  The 3,713 building units involved had an officially declared value of MOP4.57 billion, up 115% quarter-over-quarter. 


An annual comparison is less positive; the number of property transactions in the second quarter was down 53.2% when compared to the same period in 2008, with the total value of the properties down 60.8%. 

Monkey See, Monkey Do

“By continuing a process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
-John Maynard Keynes
I tend to surprise some investors whenever we are talking “macro” and I remind them that John Maynard Keynes wasn’t (initially) a government Yes Man. Today’s manic financial media tends to think of him as a beacon for big government spending. Don’t forget that Keynes made a name for himself by chastising and mocking the British government’s economic policies.
Most economic strategists and forecasters get respect after they are dead. I get that. That’s just the way life goes. Keep in mind that Keynes was only 36 years old when he penned some of his most influential writings.
Warren Buffett wrote an Op-Ed this morning that will get a lot of people’s attention. In that piece he cited Keynes’ aforementioned quote. Since this sounds a lot like what I have been pounding the monkey cage on for the last 3 months, I smiled and took a big bite of my banana.
I could care less if your run of the mill revisionist Wall Street economist disagrees with me on the US Government Burning The Buck. 1. It’s a mathematical reality, and 2. If Buffett (and now PIMCO this morning as well) supports the “view”, there will be more than one dog barking from here on in. Monkeys get excited when dogs bark.
One of the key differentiators between the time that Keynes made this critical point on currency led inflation and today is this thing called You Tube. In all economic crises past, governments have been able to maneuver “secretly and unobserved.” That’s changed. We’re watching every move that the old boys in De Club are making. They will be held accountable.
PIMCO calls it the “New Normal”, and I get how that ring tone nestles nicely into the Street’s narrative. Nine months ago, I labeled it “The New Reality”, and despite getting overridden by PIMCO, I’ll humbly re-submit one of our core Q4 2008 Macro Themes. The New Reality of financial forecasting is to uphold these 3 basic principles: Transparency, Accountability, and Trust.
That’s it – very simple. Show us, Mr. Geithner, what it is that you do. Be accountable to your global macro investment process and what you are doing to this country’s currency. We’ll decide whether or not we trust you. That’s The New Reality.
Whether it’s Buffett finally You Tubing the US Government’s debt issuance as a “gusher of federal money” or PIMCO’s Curtis Mewbourne posting on his company’s website that he effectively sees the US Dollar as losing its status as the world’s reserve currency, it’s all the same point – it’s the point we continue to hammer on. It’s the point that those who are surveying the world as an interconnected marketplace of colliding economic factors understand. There is no “I” in USA.
Some people use monkey charts - I use mathematical inputs born out of complexity theory to come up with my risk management levels. Complexity theory allows me to find deep simplicity in investment conclusions. That’s all my Q3 Macro investment Theme of Burning The Buck boils down to. One simple and dominating investment point that’s been born out of a very dynamic ecosystem of interacting global macro factors.
So, Dear Mr. Buffett – before we run into the long term TAIL of inflation output (Q409), here’s the intermediate term TREND call. US Dollar down = everything priced in US Dollars up. US Dollar up = everything priced in US Dollars down. That’s it. That’s still the call.
Inverse correlations in global macro aren’t perpetual. As they morph into consensus, returns get crowded out. With respect to our Q3 Burning The Buck theme, we haven’t seen daily, weekly, or monthly returns crowded out yet.
On Monday, with the US Dollar up, I made purchases. Yesterday, with the US Dollar down, I made sales. Buy low; sell high – rinse and repeat.
In sharp contrast to the zero-accountability model that most “economists” and sell side “strategists” abide by, The New Reality model of responsibility in recommendation here at Research Edge empowers me to be fully transparent with every market move I make. All of the long and short sales I made in our virtual portfolio have a time stamp on our portal at www.researchedgellc.com. No, I don’t have a “conviction buy” list versus a “buy” list. Whatever that means…
With the US Dollar down yesterday, I made long sales in COW (cattle/pork ETF), XLB (Basic Materials ETF), and Cardinal Health (CAH). On the short side, I shorted CKE Restaurants (CKR), Darden Restaurants (DRI), Eli Lilly (LLY), Research In Motion (RIMM), and AutoZone (AZO).
All of these tickers were green when I sold/shorted them. I like selling green bananas to the monkeys who will eat them. With the US Dollar trading up this morning, I’ll be looking to buy/cover on red. I learned these rules as a child watching street lights. I know, a monkey could do the same.
My immediate term TRADE support for the SP500 is now 979 and I have immediate term upside resistance at 1,000.
Best of luck out there today,


XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

USO – Oil FundWe bought USO on 8/10 and 8/17. As the Buck breaks we want to be long oil.

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy, which posted a positive Q2 GDP number.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.


VXX – iPath VIXAs the market rolled over and volatility spiked, we shorted the VXX on 8/13.

UUP – U.S. Dollar Index We believe that the US Dollar is a 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. Longer term, the burgeoning U.S. government debt balance will be negative for the US dollar.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.

EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

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. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%



19 AUGUST 2009




  • Target stands out as one the few retailers willing to comment on early back to school sales and the results are encouraging (yes, we know it’s early in the season). Based on the small sample set of only two weeks worth of data, Target commented that back to school and back to college sales are tracking ahead of plan and the overall run-rate for the month is tracking ahead of 2Q results. There are still 11 weeks to go in the quarter, but the fact that management was willing to comment suggests there is a higher level of confidence emanating from the big red bullseye. Of course, substantial earnings upside following an epic battle with Ackman also helps.


  • Home Depot’s CEO did not shy away from a point blank question asking when same-store sales would actually turn positive. In a sign that stability and visibility are building, the CEO responded with, “I would say it will be some time in 2010 and probably second quarter or back half of 2010.” With domestic same store sales down 6.9% in 2Q, there is clearly work to do before the topline turns positive. Interestingly, the CFO believes expense leverage on the upside will be disproportionate to the downside (which currently tracks at about 10bps of SG&A deleverage per 1 pt of comp decline).


  • For the second time this year, TJX increased its store growth plans for the year. The company now plans to open 90 stores in 2009, up from a recently revised range of 80-85, and an original plan of 65. Store growth next year is now expected to be even greater than the 4% square footage growth planned for ’09. TJX stands out as one of the few companies taking advantage of real estate dislocation, both domestically and in Europe.


  • With an essentially unchanged environment for the luxury consumer in 2Q, SKS was able to generate a better than expected gross margin result despite a still-weak topline. When pressed on the its conference call, management noted that they are trying to ease off of promotions as supply/demand has become better balanced. The company is promoting less frequently and is now pulling some items out of promotion all together. This all sounds positive, but we caution that it will take the consumer quite a bit of time before she feels compelled to purchase at full price. To some extent, lower initial pricing and mix shifts toward lower price points may help offset promotional cadence but it is still early to make a call on these merchandising changes.


  • In another sign that visibility may be improving slightly, Perry Ellis management reinstated its policy of providing fiscal year earnings guidance with the reporting of its 2Q results. The company cited better visibility on the Fall season coupled with cost controls as the key driver behind the EPS outlook, which calls for $0.70-$0.85 per share. Consensus is currently $0.75.


  • Our latest data point from the running shoe market suggests that the demand for technical shoes is improving. Fleet Feet, an operator of 90 specialty running stores nationwide with brands like Brooks, Asics, Saucony etc., reported 1H comps up 8.4% with June comps up 11.1%. The June result was best month so far this year. Not only is this an indication of accelerating demand, but this also lends support to consumers’ desire to seek “value” (but not necessarily price) given the highly trained staff that typically works at a highly specialized retail store.




-Retail sales in central London in July were 2.2% higher, on a like-for-like basis, than a year ago, when sales were up 5.8%. Retail footfall in July fell back below its year-earlier level, hit by the wettest July on record and many clearance sales coming to an end. Sterling's weakness against the euro continued to attract overseas visitors, especially those from western European countries. Middle Eastern visitors were more numerous, coming before Ramadan. Food, clothing, footwear and outdoor living slowed as the wet weather turned minds to indoor items such as homewares and furniture. <brc.org.uk>


-New USDA world cotton consumption report sees slight uptick - The latest US Department of Agriculture (USDA) forecast for 2009/10 projects that world cotton consumption will increase by 2% increase from 2008/09 but the growth rate is well below the 2004-2007 average.  The modest rebound is forecast as the world economy begins a slow recovery from the most severe global economic conditions in decades. Meanwhile, cotton consumption among the major spinners has become more concentrated. The top four cotton-spinning countries are forecast to account for nearly 73% of global consumption in 2009/10, up from the 2004-2007 season average of 69%. In addition, the top three spinner’s shares continue to increase. China and India have each increased their share of world cotton consumption recently by nearly 2% above their respective 2004-2007 averages. Pakistan has seen its share rise also, while Turkey’s share of global consumption has declined. <fashionnetasia.com>


-Sri Lanka to revive cotton production - Sri Lanka's Member of Parliament and senior Presidential Advisor Mahinda Rajapakse said the government aims to revive cotton production in the country on levels that were achieved in the past. He said nearly 50% of the cotton demand of the country were met by the production of the Hambantota province which had alone met the need of the handloom sector back in the 1970’s. He said initially cotton bales were imported from India, which later led to importing yarn and finally fabrics which sounded the death-knell of the cotton sector in the country, but the government would do everything to make Sri Lanka sufficient in cotton production.   <fashionnetasia.com>


-Pakistan's Ministry of Textiles passes new policy to revive textile exports - Pakistan's Ministry of Textiles has announced to launch an export development fund amounted Rs 40 billion under the new textile policy for the first time in the history of the country. To revive textile exports, the new National Export Policy (NEP) has targeted to increase revenue from exports to US $25 billion within the next five years and as a first step has reduced the mark-up to 5%. Under the NEP, the government is planning to provide zero rating to exports which could help the exporters price their products competitively and is also offering relief to manufacturer-exporters who are unable to clear their debts. <fashionnetasia.com>


-Top Online Apparel and Accessories Retailers - According to figures from Nielsen, eBay was the leading online retailer in the apparel and accessories category during July, with nearly 2.6 million purchases — representing 27 percent of all apparel and accessories purchases online that month. The category’s buyers spent an average of $81.83 each, and made 1.54 purchases each. EBay consistently ranks among the top online retailers in terms of traffic, according to Nielsen. Other top retailers during July included Victoria’s Secret, Lands’ End, J.C. Penney Co. Inc., plus-sized merchant Woman Within and Old Navy. The majority of the Top 10 retailers are either midpriced or discount shopping destinations for money-conscious consumers. <wwd.com/business-news>




-The collapse in retail spending is hammering stores in Eastern Europe - The region's severe recession sent retail sales down an outsized 29% in Latvia in June compared to a year ago, 20% in Lithuania, 17.8% in Romania, and 10.5% in Bulgaria. For the entire 27-member EU, retail was up 0.1%, a figure that underlines the disproportionate impact the recession is having on the European Union's newer, eastern members. Some analysts think retail statistics look so much worse than in the West in part because some hard-pressed retailers are moving sales off the books to avoid taxes — meaning those sales don't show up in the totals. In many places, stores are shuttered, and many windows are plastered with political posters and signs offering fire-sale discounts of up to 90%. Eastern Europe is getting a cold shower after years of heady growth fueled by cheap bank loans and the euphoria of EU membership in 2004. Romania, Bulgaria, and Hungary and the Baltics are struggling, while Poland and the Czech Republic are faring relatively better.  <google.com/hostednews>


-As Shoppers trim expenses, coupon use is robust at department stores and mass market retailers, as well as at grocery stores - The economic crisis has eroded the stigma linked to coupon-clipping, with shoppers seeking any financial advantage they can get, according to a survey by marketing firm ICOM Information & Communications. A total of 86.5% confirmed they utilized coupons in the previous month at grocery stores, 41.3% tapped into coupons for purchases at department stores or mass merchants; 46.5% at restaurants, and 34.9% used them to shop for personal or health care products at drugstores. Coupons enable typical households to save 25% a year without cutting purchases, and almost all retailers are “increasing the number of coupons they issue,” Storey said. A separate study for the National Retail Federation found 43.4% of shoppers said coupons influenced them to shop at a particular store, and coupons or sales influenced 47.8% of back-to-school purchases.  <wwd.com/retail-news>


-Guess is sued by a Manhattan property owner for failure to comply with agreement - A Manhattan property owner that ended a lease with Steven Madden Ltd.’s retail unit to make way for a Guess store sued Guess Retail Inc. after Guess allegedly backed out of the new agreement. According to a lawsuit filed in U.S. District Court in Manhattan on Aug. 14, 720 Lex Acquisition LLC agreed in June 2008 to rent its entire building at 720 Lexington Avenue to Guess. The 15-year lease called for Guess to pay $30 million in rent over its term. As part of the preparation for its new tenant, the property owner said it terminated a lease with the building’s previous occupant, Steve Madden Retail Inc. <wwd.com/business-news>


-Escada's US arm has followed its German parent company in filing for Chapter 11 - The Munich-based luxury fashion house filed for bankruptcy on Friday and was followed this week by Escada USA. Escada told WWD that the US arm had followed suit in order to stabilise Escada’s important American business, which accounted for approximately 20% of the group’s sales in 2008. An Escada spokesperson said that the move was “a crucial first step in the overall restructuring of the group.” The group saw its latest restructuring proposal rejected by bondholders last week and received interest from a potential buyer, Munich lawyer Nickolaus Becker, yesterday. <drapersonline.com>


-JD Sports to acquire online sports retailer Kitbag - According to reports, JD wants to buy the business from home shopping group Findel, which has been trying to offload its non-core assets. Kitbag is also understood to have courted interest from private equity groups. Kitbag employs around 200 staff and has a turnover of around £30m. JD has made several acquisitions this year including French retailer Chausport and rugby brands Kooga and Canterbury Europe.  <drapersonline.com>


-Easton-Bell Sports, Inc. reported sales declined 15.2% Q2 09 (down 12.6% on a constant currency basis) - Team Sports net sales decreased 23.8% for the second quarter due to the decline in sales of baseball and softball bats, football equipment and the negative impact that the currency fluctuations had on sales of hockey equipment in Canada and Europe. Action Sports net sales decreased 2.3% due to lower sales of OEM cycling components and powersports helmets, partially offset by increased sales of snow sports helmets and cycling apparel. Benefited during the quarter from ongoing focus on cash management, including lowering inventories, which helped reduce net debt. <sportsonesource.com>


-Retail market in the Orlando area appears to be showing signs of life - The retail market in the Orlando area appears to be showing signs of life in the first half of this year, according to the International Council of Shopping Centers’ bi-annual Florida Retail report. Despite seeing a 3% increase in the unemployment rate since the end of 2008, some Orlando submarkets saw increases in rental rates through the first six months of the year, said the report, released Aug. 17 during the ICSC’s convention at the Gaylord Palms in Orlando. But many of those same submarkets also saw huge drops in occupancy rates, the report said. The Orlando market saw an overall 2% drop in retail occupancy, from 91.6% at year-end 2008 to 89.7% in midyear 2009. Meanwhile, rental rates saw a 1.1% decline <bizjournals.com>


-Intimonth LLC today kicks off its contribution to the nation's stimulus package by launching 1000000freepanties.com - Without the need to wait for a tax return or a stimulus check, 1000000freepanties.com aims to give away one million free panties to anybody that requests a pair. Intimonth LLC believes that a new pair of sexy panties will help people forget the ongoing economic, political and personal problems facing them today. So let people forget their troubles and work on their own relationships with a new pair of seductive panties. Imagine how that will stimulate the economy. These panties, which normally retail for $40, are made from the finest satin, silk and other stimulating materials in styles including Thongs, G-Strings, French Knickers, Bikinis and  Tangas. Visitors to 1000000freepanties.com will also have the opportunity to explore and join monthlylingerie.com. Monthlylingerie.com is the largest lingerie club on the Internet and stimulates its members every month with European designed lingerie delivered directly to their home. <prnewswire.com>


RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): AZO

08/18/2009 11:04 AM


Re-shorting AutoZone on a green day. We don't like current clunker trends or the sell side upgrade that gives us this great re-entry point. KM




RL: Ralph Lauren, CEO, sold 127,600shs (~$8.2mm) less than 1% of total holdings pursuant to 10b5-1 plan.


CAB: Mark Reuben, Director, purchased 200,000shs (~$3mm) on a base of over 500,000shs owned.



  • Tracy Gardner, President – Retail & Direct, sold 80,000shs (~$2.4mm) roughly 50% of total common holdings upon exercising the right to buy 90,000 pursuant to 10b5-1 plan.
  • Libby Wadle, EVP Factory & Madewell, sold 16,573shs (~$507k) less than 30% of total common holdings pursuant to 10b5-1 plan.


JOEZ: Joe Dahan, Creative Director, sold 600,000shs ($420k) less than 5% of total common holdings.


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.      

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