It's clear to us that management is low balling Q2 - commentary didn't match guidance. Lofty expectations are a problem for the stock, however.




  • Brand perception is most of the way back
  • Brand loyalty is almost 
  • Cautiously optimistic - expect pricing to improve
  • Costa - up 50% YoY on bookings volume.  Doubling of trust in confidence in core European market
  • NA brands caught up on occupancy while European brands are pushing out the bookings curve 
  • Will turn corner in 2H 2014
  • Advertising expenses for 2014: $600MM  (+20% over 2012)
  • Princess/Costa in Europe/ P&O Cruises launched new campaigns
  • FQ1:  
    • better revenue Caribbean/Continental European brands (5 cents) better NCC (4 cents); 
    • Capacity: +1.7%; 
    • Net ticket:  
      • -3.5% for NA brands - driven by promotions at Carnival brand; 
      • -2.5% for EAA brands - Costa increases offset by other European brands
    • Net onboard:   EAA: +4%, NA: slightly down, driven by lower occupancy at Carnival Cruise lines
    • NCC:  higher advertising spend but less than previous guidance
  • 2014
    • NA/EAA: bookings ahead by 20% at lower prices.  Carnival Cruise Lines and Costa led the way in bookings
    • 1st time cumulative bookings for next three quarters are higher than prior year as booking window widen; although they're still at lower end of historical bookings curve
  • F2Q
    • Tough comps due to pre-Triumph bookings last year
  • 2H 2014:  positive yields for NA and EAA yields
  • Expectations for Caribbean unchanged for rest of year despite better close-in performance for FQ1
  • Japan:  below expectations with Princess having 2 ships there.  Deployment represents 1% of annual capacity.
  • NA brands:
    • Caribbean:  Behind on price and occupancy; represent 50% for reminder of year; catching up on occupancy 
    • Alaska:  Behind on price but well ahead on occupancy
    • Seasonal European:  Well ahead on price and occupancy
  • EAA brands:
    • Europe (70% for remind of year):  Behind on price but well ahead on occupancy and substantially ahead of 2013

Q & A

  • For all 3 coming quarters:  higher volumes at lower prices
  • Lower occupancy at Carnival brand:  giving up a points of occupancy to maintain price
  • Historical bookings curve: 80-90% (current), 50-70% (1Q out), 30-50% (2 Q outs)
  • Carnival brand:  previously guided down mid-to-high single digits in 1H 2014 and turn positive in 2H 2014;  in Q1, Carnival turned out to be a little better than expected.  Forecast for remaining quarters remain unchanged for Carnival.
  • Costa:  occupancy up a couple of points more than expected in FQ1.  Had less ships in South America for FQ1 due to high costs there so they give up a little in yield to drive profitability.
  • Capacity growth:  +10% in the Caribbean for Carnival brand; overall market +19% in the Caribbean
  • Lower pricing happened in 2009 but pricing recovered in 2010.  They are not concerned about the lower prices.
  • Lost 10% in yields in 2009, got back half of that in 2010/2011.  Today, about 11% behind 2008 yields.  Their competition is close to 2008 yields.  
  • Switchers (New to Cruise) more price and media sensitive but smallest part of the cruiser base
  • Carnival brands:  ships sail full or almost full (as do their competitors)
  • Carnival brand recovery faster than expected
  • Costa brand recovery:  European economy still choppy but has strengthened
  • Cost savings:  hold off on forecasts, overall see further efficiencies 
  • FQ2:  impacted by higher capacity and promotional rates in Caribbean
  • FQ3:  will be negatively impacted by Japan
  • Costa  up a couple of points in FQ1 (15% of overall capacity)
  • FQ4:  expect costs to be down
  • FQ1/FQ2:  increase in costs was mainly driven by advertising
  • FQ3:  50% booked
  • FQ4:  1/3 booked
  • 2015 Caribbean capacity:  For FQ1, small decrease for CCL brands (Carnival Legend moving to Australia)
  • Refurbed ships getting higher premium pricing
  • Japan EPS impact:  assume Japan will "lose some money" but overall bullish 
  • Ukraine: has impacted some itineraries; 0.7% of overall capacity; Costa replacing May itineraries with Bulgaria/Istanbul; AIDA/Seabourn in F3Q itineraries will change as well.
  • Had not advertised Princess brand in over 10 years
  • Do not expect ECA higher costs to have a material impact
  • Dallas oil spill:  if channel opened up this wk and future cruises operate as normal, it might cost CCL 1 penny in F2Q
  • 1Q European yields (ex Costa):  were down just a little bit; UK made changes to their pricing programs and commission structure.  CCL expects an improving trend in UK overall.

Banging Your Head Against Wall?

Client Talking Points


Down Dollar means Up Yen --> Up Yen means Down Nikkei (down -11.4% year-to-date). Mother’s Index got hammered for a -5.7% loss last night as the Japanese dudes get margin calls. #GrowthSlowing in Japan continues as confidence falls.


The 10-year yield at 2.73% this morning after failing once again at Hedgeye TREND resistance of 2.81% on last week’s misplaced #RatesRising fears (that was last year’s call). The risk range for the 10-year is 2.62% to 2.81%. So, what do you do on down days? You keep buying bonds.


Are you banging your head against #OldWall debating why the Dow is down -1.8% year-to-date versus just buying Gold on the pullbacks? Gold is up +0.5% to +9.3% YTD. It remains one of the best ways to be long of inflation slowing US growth. TRADE support is $1,301/oz.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.


We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve), and strong underlying economic fundamentals. In follow-up BOE minutes, the asset purchase program was held flat by a vote of 9-0 and the interest rate was held unchanged by a vote of 9-0. This week the UK’s Office for Budget Responsibility updated its forecasts and sees 2014 GDP at +2.7% versus forecasts of +1.8% a year ago and +2.4% in December. It also increased the 2015 growth forecast to +2.3% from +2.2% previously. The OBR sees budget deficit at -6.6% of GDP in 2013-14 from -6.8% previously forecast, and sees debt peaking at 78.7% of GDP in 2015-16, and falling to 74.2% of GDP in 2018-2019. News out this week discussed Chancellor Osborne closing in on a deal that would see the City of London become an offshore center for trading the Chinese currency. The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.

Three for the Road


Home Prices in the UK continue to follow the path of purchasing power +6.8% y/y FEB vs +5.5% last #StrongPound @KeithMcCullough


"Life is the art of drawing without an eraser." - John W. Gardner


Malaysia Airlines has offered initial financial assistance of $5,000 per passenger to the families of Flight 370 passengers, and promised that additional compensation was being prepared. The airline is eventually likely to pay next of kin compensation that ranges into the millions of dollars per passenger. Under an international treaty known as the Montreal Convention, the airline must pay relatives of each deceased passenger an initial sum of around $150,000 to $175,000. (CNN)

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Becoming King

"Kings are not born, they are made by general hallucination."

-George Bernard Shaw


On this day more than 700 years ago, Robert the Bruce became the King of Scotland.  Robert was one of the most well known warriors of his generation and led the Scots in their wars of independence against Britain. 


Prior to successfully defeating the British, according to legend, Bruce was hiding in a cave on Rathlin Island off the north coast of Ireland. While in the cave Bruce purportedly watched a spider spinning a web in an attempt to connect one area of the cave's roof to another area.  (Clearly, Robert the Bruce had some spare time on his hands.)


 Becoming King - Battle of Bannockburn   Bruce addresses troops


The spider repeatedly failed but after each failed attempt kept turning back to the task at hand. Eventually the spider succeeded.  According to legend, Bruce is said to have used this as inspiration to continue his war against Britain where he eventually inflicted on them a number of critical defeats on the path to Scottish independence.


This story also supposedly inspired the maxim: "If at first you don't succeed, try try try again." 


Back to the Global Macro Grind ...


As the story of Robert the Bruce teaches us, becoming king is not an easy task.  As it relates to asset class performance this year, there aren't a lot of kings in the year-to-date. On a country basis, the top three decliners are as follows:

  • Russia -19.5%
  • Venezuela -14.8%
  • Czech Republic -12.6%

Japan is a close runner up to the top three and comes in fourth with a -11.5% decline on the Nikkei in the year-to-date. Incidentally, the Japanese Mothers Index (more small cap focused) is down a staggering -5.7% today. 


As the reigning King of Russia, Vladimir Putin is certainly learning the pain of trying to broaden his kingdom. On the back of Russia's literal annexation of Crimea, Russian equities are getting clobbered as noted above.


This morning the West is implementing more actions to further alienate Russia. The big symbolic one is that the G-8 summit, which was originally scheduled for Sochi this summer, has now been moved to Brussels and Russia has been uninvited.


In part, this and the myriad of sanctions that have been implemented against Russia are largely symbolic.  No doubt the most significant sanction is the one that has been implemented by the markets themselves as noted above by the almost -20% decline for Russian equities in the year-to-date. To the extent Russian equities continue to decline and Russian companies are challenged to tap the public markets to raise capital, Putin will certainly be wondering whether it is all worth it to become king.


The King of Fed watching, Jon Hilsenrath from the Wall Street Journal, wrote an interesting article yesterday highlighting the odd (for lack of a better word) nature of economic target setting by the Federal Reserve.  According to Hilsenrath, even though the Fed expects a 5.4% jobless rate in 2016, a normalized level, they are still likely to keep interest rates at a level that is well below normal (typically considered 4%-ish on the Fed funds rate).


To the extent this turns out to be accurate, it is likely that we continue to see inflationary assets (Gold) continue to front run this long term dovish policy.  The broader concern, of course, is the arbitrary nature of employment targets such as the jobless rate.  In the Chart of the Day, we highlight a chart we have shown many times in the past which is the labor force participation rate. 


As the chart shows, the U.S. is literally at generational lows in terms of participation in the labor market.   In fact, labor force participation peaked at just under 67.5% in 2000 and has been in relatively steady decline ever since.  Currently, the labor force participation rate is just over 62.5% and at an almost 35-year low.


This emphasizes the oddity of the Federal Reserve using an arbitrary data point such as the jobless rate to highlight the health, or lack of health of the economy, since the jobless rate doesn’t take in to account the people simply dropping out of the labor force.  For today, we’ll leave a discussion of whether the Fed’s extreme dovishness has helped the economy to the side, but certainly the arbitrariness of their targets has and continues to confuse the markets. This is likely why the 10-year treasury rates are down almost 10% on the year and down again this morning. Simply put: investors don’t believe what the Fed is saying.


To add to the confusion, this morning Philadelphia Fed chief Charles Plosser is indicating he believes that Fed Fund rates will hit “2-something” by the end of 2015 and 3% by the end of 2016.  This is more than a 300 basis point move in the next couple of years.  Plosser also indicated he finds the market’s reaction to Yellen’s press conference last week confusing.  Well, Mr. Plosser, confusion breeds contempt, as they say.


Conversely, the United Kingdom, despite losing Scotland to Robert the Bruce many years ago, appears to have a central bank that is at a minimum providing some confidence to the markets and allocators of capital.   The U.K. reported CPI this morning at +1.7%, which suggests an inflationary environment in the U.K. that is relatively benign. 


Certainly, we’d be somewhat hypocritical if we assumed the CPI was the best gauge of inflation in the U.K. (it is a government constructed number after all), but nonetheless the key economic indicators in the U.K. continue to trend the right way as evidenced by CPI coming in lower versus the +1.9% reading in January. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.62-2.81%


VIX 13.34-17.42

USD 79.11-80.39

Gold 1 


Best of luck out there today and long live the king!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Becoming King - Chart of the Day


Becoming King - Virtual Portfolio

LEISURE LETTER (03/25/2104)




  • CCL to report earnings pre-market, conf call at 10am EST ()

  • Las Vegas: 29th Annual Nightclub & Bar Convention Trade Show 40,000 delegates Las Vegas Convention Center

Wednesday, March 26

  • PENN at TAG Spring Consumer Conference
  • Melco Crown Extraordinary General Meeting
  • Melco Crown Board Meeting  

 Friday, March 28

  • Nevada gaming revenues release for February 



RCL -  Due to the oil spill and associated response efforts in the Port of Galveston, the March 23 Navigator of the Seas sailing has been canceled.  Guests will be refunded in full, will have the option to book a future cruise at a 25% discount, & may remain onboard until March 30.


TAKEAWAY:  Unfortunate cancellation for RCL but not material on an ongoing basis.


WYN -  The Art Deco New Yorker Hotel, located at Eighth Avenue and 34th Street, is undergoing a full makeover and transformation from the Ramada brand to the Wyndham Hotel & Resorts flag.  The property is owned by a subsidiary of the Unification Church.  Additionally, commercial space on the lower 18 floors is being converted into 172 additional hotel rooms. The hotel currently holds 912 rooms, and when all of the changes are complete, that number could jump to 1,500. As leases expire over the next five years, 270,000-square-feet of space will be freed up and turned into guest rooms.  The property is located two blocks from the Related Companies Hudson Yards project


TAKEAWAY:  NYC already having trouble absorbing above industry supply growth.


Saipan – We highlighted the Saipan Casino Legislation in our March 3rd Leisure Letter. The gaming legislation was signed into law by Governor Eloy Inos. The law allows a 40-year exclusive Saipan casino license - Inclusive of an initial 25-year period and an extension of 15 years - and a second option to renew for another 40 years for a total of 80 years.  The legislation requires the exclusive Saipan casino license holder to build from the ground up a hotel with at least “2,000 rooms,” but also does not set a timeline nor specify a phased-in approach. (Side note: currently the largest Saipan hotels currently have just over 400 rooms.)  The bill specifies that the $1 million in nonrefundable application fee and the $30 million in advance license fee payment shall be paid within 15 days of the law’s signing.  However, the casino legislation also gives the exclusive gaming licensee a rebate offset amount of 100 percent of the gross gaming revenue.


TAKEAWAY:  With current annual visitation of approximately 450,000 (comprised of 40% from Japan and 20% from China), that's only a small percentage of the total 730,000 room nights at a 2,000 room hotel. We remain skeptical of the casinos profitability and viability given the isolated location.  Additional airlift is required to ensure casino visitation. 




Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 


TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.