By Rebecca Runkle and Team


“It’s choice -- not chance -- that determines your destiny” Jean Nidetch


I always find it worthwhile to take a fresh look at change after a (hopefully decent) night’s sleep.  My head is clearer and less biased with my knee-jerk reaction and I am better able to digest the situation with a rational mindset.  This morning my mind is filled with Dell’s proposed acquisition of Perot for $3.9 billion.  Taking all things into consideration, this will prove a decidedly strategic and positive deal for Dell.  See Rebecca Runkle’s portal for more details.


TODAY’S TRADE - Runkle was one of the first in 09' to be bullish on DELL, and after CS downgraded it, she's the first to defend this Perot deal (see her note for details). Buying red!



HEALTHCARE: Doctors Behaving Badly 

By Tom Tobin and Team


President Obama keeps talking about ways to fix "runaway healthcare costs" without talking about the way Medicare pays for services.

The payment process has avoided scrutiny throughout the Health "Insurance" Reform debate. Payment Reform should be well ahead on President Obama's to-do list than banter with David Letterman.  The debate is still not changing, although 500 amendments to the Baucus proposal would suggest an intense interest in getting something done despite the political stalemate.  I see lawmakers staking out a new sphere of political influence rather than dealing with Obama's 8 core principals and it’s not dissimilar to watching the specialist dominated AMA (70% of its membership) write the reimbursement codes which Medicare uses to pay physicians for services (self-dealing).  Check out the links below for a more thorough discussion of why this is a bigger problem than mandates and taxes on Cadillac health plans.


We are long the XLV and AMGN, QGEN and UNH are our favorite names in Healthcare.


See Tom Tobin’s portal for more details. 




By Brian McGough and Team


While Dollar General’s impending IPO is likely one of the largest and most visible IPO’s on the calendar, it is worth noting that there are a handful of other apparel/retail companies lined up to go public in the coming months. For now, the list is as global as we’ve seen in a long time, but we suspect many U.S. private equity firms will be watching closely to see how these offerings fare as they too contemplate monetizing some of their “peak-market” acquisitions.  See Brian McGough portal for more of the details …  


UA continues to be our favorite long-term names…


Is Your Team Effective?

Most of us in the money management business have experience working and making decision in teams.  Whether it be on the athletic field during collegiate sports, in graduate school for study teams, or in the actual work place, working and interacting effectively as a team can be critical for success.  This weekend we read an interesting study relating to the most effective teams for investment committees that was written by Michael Mauboussin from Legg Mason Capital Management. 


Some of the key takeaways from Maboussin’s work, which was a summary of other studies,  was as follows:

  • According to J. Richard Hackman, a professor of psychology at Harvard University: “My rule of thumb is that no work team should have membership in the double digits (and my preferred size is six), since our research has shown that the number of performance problems a team encounters increases exponentially as team size increases”;


  • Brooke Harrington, a research at the Max Planck Institute for the Study of Societies, analyzed investment groups and found: “The larger the proportion of friendship and other socioeconomic ties within a group, the worse its portfolio performs; the larger the proportion of relationships based on professional, financial, or academic ties, the better the group performs”;


  • A survey by Arnold Wood and John Payne found that 85 percent of investment committee members were white males over 50 years old, they found no members under 30, only 15% were women, and only 5% were minorities; and


  • A recent survey of defined contribution committees found that they spent over one-half of their time, more than that on any other issue, discussing past investment performance – an unimportant knowable. Unimportant in the sense that there is nothing the committee can do about it ; and


  • In putting together committees, leaders sometimes seek to find experts to match the problems the committee will face.  So if the committee needs to decide about an allocation into alternative investments, they seek a member with experience in alternatives.  According to Phillip Tetlock, a psychologist at the University of California-Berkeley, writes: “People who devoted years of arduous study to a topic were as hard pressed as colleagues casually dropping in from other fields to affix realistic probabilities to possible future outcomes.”

The conclusion of all these points is that most effective decision making teams should have a number of attributes.  First, these teams should be a manageable number.  Second, the group should not be incestuous in terms of social ties.  Third, there should be a diversity of experiences within the group.  Fourth, groups should not overweight “expertise” for longer term decision making.  Finally, time allocation is critical and groups should focus on finding solutions to important questions (not debating the market or prior performance).


Our firm is comprised of quite a few Yalies and, as many of you know, we are located on the outskirts of Yale’s Campus in New Haven, CT, so we are obviously predisposed to like all things Yale.  We are not beyond You Tubing ourselves though, and a quick look at Yale’s Investment Committee suggests that it may not have the most optimal structure.    The Yale University Investment Committee has ten members, and eight of those members are white males.  Two of the members, Richard Levin and Shauna King, work for Yale.  Of the remaining eight that do not work for Yale, seven work in the finance industry.  The only outlier is Judge Barrington Parker.  So, in aggregate, the Yale Investment Committee has a very white, male, and finance oriented Investment Committee, with very comparable social levels.   In theory, this is a very suboptimal structure.


That said, it is possible for some investment committees or decision making teams to outperform.  This will occur when the individual members of the groups are better individual decision makers than average.  A political scientist at the University of Michigan developed the diversity prediction theorem and the equation reads as follows:

  • Collective Error = Average Individual Error – Prediction Diversity

The takeaway is that if the average individual error is lower for a group then that group may be able to overcome a deficiency in diversity.


In conclusion, as we make strategic decisions as teams, whether it be for investments or the strategic direction of a business unit or company, we can structure teams in such a way to make much, much better decision and plans, so as to increase our probability of success.  The days of a small group of white men going on an offsite to make strategic decisions are behind us, or at least the research tells us they should be.



Daryl G. Jones
Managing Director


Casual Dining – Outback’s new look

Although Outback Steakhouse is out of the public eye, it does not mean that what it is doing is not important.  We know that business is tough for Outback Steakhouse, as the company reported last month that same-store sales at the Outback dropped 10.4% in the second quarter ended June 30.  Clearly, the company needs to do something to change the perception of the concept, outside of just lowering menu prices. 


The following are a few pictures of the remodels the company has done in Florida and Virginia.  With 900 units in the US, Outback is a competitor that should not be forgotten.  Just something to keep in mind as it relates to the other steakhouse competitors.


Casual Dining – Outback’s new look - osi1


Casual Dining – Outback’s new look - osi2


Casual Dining – Outback’s new look - osi3



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Terrific Q3. Surprisingly, lower Q4 guidance but generally better forward commentary. 




The following is our transcript from the CCL conference call that just ended. 


3Q09 Commentary:

  • The beat was driven by better yields, which benefitted them by 12 cents, while onboard spending and other contributed 2 cents
  • Cost cutting measures benefitted them by 3 cents
  • Capacity increased 5.5%, European grew 7.5% vs NA grew 3.6%
  • Overall net revenues yields decreased 12% in local currency
    • Ticket yields
      • NA brands were down by 20%
      • European brands only decreased 6%
  • Onboard yields were down but less than they were in 2Q, Europe was better than NA
  • Cruise Costs per ABLD
    • Net cruise costs, excluding the settlement, were down 2.4% (excl. fuel)
    • Fuel was 39% lower than last year
  • They are well positioned through the end of 2010 but may seek to opportunistically raise more capital



  • Closer in bookings are better than expected.  They have been running 19% ahead for 1Q2010. The gap in occupancy has significantly closed and the booking window has been widening 
  • Pricing is stable, but is better on select itineraries 
  • If current booking trends continue pricing should improve.  However, because most of the bookings for 1Q2010 are on the books, yields will be down in local currency but neutral to slightly better (because of the FX benefit) when adjusted for currency 
  • Moving older ships to the European fleet to third party tour operators – one out on a long term charter covering the remaining life of Costa Europa and the other is an outright sale (old P&O - Artimis)
  • 4Q2009 Color: 
    • Capacity increase: 5.7% in NA, 9.6% Europe 
    • Pricing is lower, but occupancy is the same y-o-y and there is very little inventory left to be sold
    • NA brands will have 45% capacity in Caribbean and 10% on the Mexican Riviera
    • Lower pricing for most itineraries – higher price products suffering the most declines 
    • NA down mid-teens in 4Q 
    • Alaska: Industry filed a suit against the head tax 
      • 2010 is still experiencing lower demand
    • Europe pricing is moderately lower, CCL expects a modest decline in local currencies
      • Should be flat-to-positive when adjusted for the FX benefit
  • 1Q2010
    • Fleetwide capacity up 9.9%, 15% for Europe, 5.5% for NA 
    • NA brands: 62% in Carribbean, 11% in Mexican Riviera 
      • Pricing is moderately lower, with Mexican Riviera down the most 
      • Have been able to increase pricing on some itineraries 
      • With such a large portion already sold for 1Q2010, they will see less of an impact from better short term positive bookings 
    • European itineraries are holding up well, only moderately down 
      • They expect pricing will only be down slightly by the time the quarter closes (in local currency) and current dollar yields will be neutral-to-slightly higher
    • South American yields are down more significantly (large increase in Brazilian supply)
  • 2Q2010:
    • Capacity increase set to be 9%, 4% for NA, 15.2% for European brands
    • Overall occupancy moderately down for NA & Europe 
    • NA is 54% Caribbean 
      • Pricing is lower than 2009, but better than 1Q09 last year 
    • European brands: 57% in Europe, 10% transatlantic 
      • Pricing (LC) lower than last year



  • Recovery timing?  
    • The company thinks the recovery will be slower than prior recoveries.  They believe it will be a slow emerging environment for yields.  2010 yields should be stable-to-slightly improving as year progresses
    • In the last recovery it took them two years to get back to where they were in prior to the downturn
  • No fuel supplements to be implemented yet 
  • Quantify extension of the booking window: 
    • It varies by brand, but overall 15-30 days improvement
  • Appetite to build new ships in out years 
    • Pricing in euros is back to the reality rates of 2003 when they ordered last time, but the dollar is weak 
    • It is unlikely that they sign any contracts by end of the year, which means that 2012 deliveries are unlikely 
    • US brands less compelling 
    • Would like to build some Princess 
  • Seeing more expansion in the booking window on higher end brands – because they were hit a lot harder 
    • Trade up recovery? 
    • Very difficult to compare to prior downturn because their portfolio was so different back then 
  • Dividend? 
    • The overall business tone is improving
    • Wanted to get their rating to A-
    • Liquidity has improved
    • So the bottom line is that they will make a recommendation to the board based on those three factors when considering reinstituting the dividend
  • Is there more room to cut costs?
    • They have taken out a lot of costs on the shore side area
    • Consolidated large part of their Alaskan operation
    • Probably in the 5th & 6th inning of cost cutting, remaining cuts may involve restructuring certain business
    • Operating companies are working closer together than they ever have before
    • Fuel conversation is an ongoing effort - only half-way there in terms of cost savings there
  • How do bookings look for Drea?
    • Bookings are terrific, they are getting a very significant yield premium
    • Oasis is doing great and so is the Odyssey
  • 4Q09/1Q2010 – what is a normal curve for remaining bookings?
    • Pricing is now essentially stable overall and, as they are able to catch up on occupancy, they have been able to tweak up pricing on certain itineraries (they are saying from current pricing less so than from pricing a year ago)
    • 5 cent benefit in the quarter,
      • Last year they had a penny related to insurance settlement
      • Accounting for FIN 48, this year they had a reversal
  • On Board spend update?
    • 3Q09 saw declines in most categories, but declines weren’t as great as those in 2Q09
  • Lower commissions, transportation & other due to less airport bookings and lower air booking prices (just a pass through anyway)
  • Alaska & Crystal only going in there for one year... Alaska will still have lower capacity next year
  • Generally speaking yards are hard pressed to build below cost and have already come down to reasonable prices. However, the Euro is so strong that it may not matter for 2012 deliveries.  CCL only has two ships coming online in 2012. Likely to have material cash flow in 2012 and beyond
  • Yield outperformance in 3Q09 implies that last minute booking prices were up about 20% (in order to beat by the amount they beat by) since 85-95% is already booked.  Onboard yields also helped. In July and August people just decided to take their vacations –  this implies pent up demand
  • The company expects that beyond 1Q2010, each quarter's yields are to get sequentially better
    • They won’t say that they will actually be positive in 2Q2010
    • Harder to predict now that it is in the past
    • Will increase pricing if this type of volumes continue
  • Current pricing in NA and Europe are well ahead of where second quarter closed last year (I'm confused here)
  • Art auctions and casinos are down a lot more than other onboard revenues
  • 10% change in fuel = 116MM or 15 cents a share; 10% movement in USD = 140MM or 17 cents a share


We thought slow foot traffic early in the month was indicative of a softer month than Aug as Macau headed into the holiday filled October. However, VIP, high end Mass, and high hold percentages are contributing to a strong Sep.



Following a casino walk through on 9/10/09, my Macau guys reported slow foot traffic.  Apparently, Mass business has picked up considerably - especially over the last two weekends - while VIP has been very strong all month.  Through 9/20 the month was up about 60% in year-over-year revenues according to reports out of Macau, off of an easy comparison.  Mass is definitely strong but it looks like most of the gain is coming from VIP, as can be seen by our estimated market shares in the following table. We are also hearing that hold percentage is high so far versus a low hold percentage in September 2008.




SJM, Crown, and Galaxy, all VIP houses, increased market share while LVS (the bigest market share loser) and MGM lost share.  The rest of the month will probably be slow given the proximity to the holidays in October, including the 60th anniversary of the communist takeover in China.

Chart of The Day: Burning The Buck

While it’s shocking and amazing that our President can do that many TV appearances in 48 hours and not talk about this chart, don’t bet on our Treasury Secretary saying anything about it any time soon either. Today, at $76.11 (US Dollar Index) America’s currency is crashing to new lows. All the while, America’s said financial “fiduciaries” are being willfully blind to this real-time global macro event.


The marked-to-market, Global Financial System, fortunately, must not be as stupid as Timmy Geithner thinks Americans are. Everyone with bucks is seemingly blowing them out again today. This assures a setup for the G-20 meetings in Pittsburgh where the world’s economic power is set up to shift.


The Chinese, the Russians, the Germans, the Australians – they’ll all be there, calling for the same thing. A diversification away from the US Dollar serving as the worlds Reserve Currency. No more Madoff. No more Stanford. No more Japanese style ZERO rates of return for your citizenry and creditors alike every time your stock market goes down.


From Bush to Obama, fully loaded with the most politicized financial system the US Government has ever overseen, does the world trust the US currency? The answer is in this chart. Price charts don’t lie; people do.



Keith R. McCullough
Chief Executive Officer


Chart of The Day: Burning The Buck - a1

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