Europe (Still) Looks Yucky

Editor's Note: This is a brief excerpt from Hedgeye CEO Keith McCullough's morning research. For more information on how you can subscribe click here.


Europe (Still) Looks Yucky - 12.19.14 chart 

3 big things happened in Europe this morning:

  • Germany reported deflation of -0.9% year-over-year in the NOV PPI
  • Central planning talk of making QE the periphery’s burden
  • Italian, Spanish and Russian equity markets all resumed their bearish TREND declines

We do not believe that ECB President Mario Draghi can get a “Big Thing” done in January to stem this European Equity drawdown.


In addition, as we outlined in #EuropeSlowing (one of our three Q4 Macro Themes) our view remains that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth. 

McCullough on Fox Business: "The Most Contrarian Thing I've Ever Heard!"

Hedgeye CEO Keith McCullough appeared on Fox Business' Opening Bell with Maria Bartiromo this morning with Jeff Kleintop of Charles Schwab and Jones Trading Chief Market Strategist Mike O’Rourke. During a heated discussion on what will drive stocks in 2015, Kleintop claimed the new year will be brighter for global growth and Keith fired back that this is the most contrarian view he has ever heard.


Next, Keith and Mike O’Rourke sounded off on the state of the markets. Keith highlighted his view that the rest of the world is an ongoing "train wreck" and discussed risks associated with rising volatility. 


In this final clip, Keith and Mike O’Rourke discussed the economic implications of low oil prices. Keith reiterated his call to buy the long bond (TLT) as growth will surprise on the down side.


Takeaway: CCL's '15 yield guidance may look low but it suggests demand isn't as robust as what the Street is projecting. Fuel saves the day.






  • Caribbean/Japan capacity issues 
  • Moving towards double digit ROIC
  • In China, operating profit more than tripled due to accommodation of capacity growth and yield improvement.
  • Fuel efficiency in 2014: 5%
  • Ship capacity:  At an average of roughly 1 ship per brand in total, over a four-year period reflecting commitment to measured capacity growth.
  • This past quarter reached agreements to sell three less efficient ships bringing total sales agreements to 24 and reinforcing commitment to measured capacity growth.
  • Further stepped up the marketing efforts with plans advertising spend higher than already elevated spend in the last two years. In total, plan spend is nearly 25% higher for 2015 versus 2012.
    • Targeted towards 1st timers
  • Conducted extensive interviews with 40k respondents to gain insight on growing demand
  • Cost-containment in 2014:  saved $20m via leveraging scale
    • Expect $100m cost cuts in 2015: including port and air agreements
  • Improved ROIC by 1 point in 2014 and expect another point in 2015
  • 4Q capacity +2% (NA: +2.5%, EAA: +1%)
  • 4Q Net ticket yield:  +2% - for both NA and EAA (NA- strong results from seasonal European programs, and late Alaska; EAA - strong results from Australia).
  • 4Q Net onboard yield:  +4% (almost across the board)
  • Lower fuel prices provided 9 cent boost to F4Q EPS
  • 4Q:  $18m restructuring charge:  relating to sell of 3 ships 
  • FY 2014 net revenue yields:  beat driven by better ticket continental European yields and better onboard/other yields in back half of year
  • CFO: $3.5 bn
  • 1Q 2015 net revenue yields: up slightly
  • 2Q/3Q/4Q 2015 yields collectively to be up 2.5% in constant dollars
  • If you normalize for the transactional currency impact, the yields for the remaining three quarters combined would be up 3%.
  • 1Q 2015
    • 50% Caribbean capacity
  • 2Q/3Q/4Q 2015
    • Caribbean represents less than 30% of capacity
  • Cautious on Australia where industry capacity expected to increase 20% YoY
  • For the first three quarters of 2015, cumulative fleet wide bookings are nicely ahead as slightly higher prices for both of our two major business segments.
    • NA brand, the Caribbean pricing is currently in line with the prior-year and nicely higher occupancy which bodes well for pricing on future bookings.
    • All other North American brand deployments combined which includes seasonal European program at Alaska are nicely ahead on both price and occupancy. Booking volumes during the last quarter have been good ahead of the prior-year but at lower prices driven by transactional currency impacts.
    • Europe itinerary are nicely ahead on occupancy and better prices. Booking volumes for these itineraries during the last quarter are also nicely higher than the prior-year at better prices.
  • ECA requirements will cost $0.10/share
  • Expect the majority of higher drydock costs in 2015 will be reversed in 2016.  Of the remaining one percentage increase, the majority is driven by higher advertising expense and product enhancements.
  • Price of Brent Oil used in guidance: $63
  • Oil benefit:  100% benefit as prices drop to $80; enjoy 50% benefit for any price drop below $80


Q & A

  • Expect another good year for Costa
  • Capacity increases by quarter:  1.7% (1Q), 2.3% (2Q), 0.6% (3Q), 3.3% (4Q); FY 2015: 2.0%
  •  $0.30 EPS guidance range which is essentially two points of yield.
  • Europe capacity concerns: European yields will be up in 2015 for NA and EAA.
  • Feel Costa recovery was impaired by the environment and economic environment in Europe. Expect to grow again next year.
  • Costa doing well, Cunard doing well, AIDA doing really well
  • Will review oil collar strategy
  • 550 dry dock days in 2015 (+50% YoY); will be reduced in 2016 (major tailwind)
  • new build
  • Carnival 2.0 benefiting onboard spend
  • Costa nice recovery in Europe and strong performance in Asia
  • Revenue mix:  50% (US$), 25% (euros), 12% (pound), 10% (Aussie)
  • No change from Sept guidance on 2015 NCC ex fuel
  • 2015 onboard guidance:  +2% (1% variance equates to 4 cents on EPS)
  • 2015 Caribbean capacity reduction:  late 2Q going into 3Q
  • ECA impact in 2016/2017:  in 2016, it will be reduced from 10 cents and mostly gone by 2017

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 80.52%
  • SHORT SIGNALS 78.67%

Macro Notebook 12/19: Yen | Europe | XOP (Oil & Gas)


Hedgeye Director of Research Daryl Jones shares the top three things in his macro notebook this morning.


Takeaway: Today we focus extensively on our quant signals for clues as to whether it's safe to increase one's gross and/or net exposure (up here).


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. Consumer Staples Select Sector SPDR Fund (XLP)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. iShares 20+ Year Treasury Bond ETF (TLT)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)



Global Macro #VolatilityAccelerating: If, like us, you’re having a terrible week from an asset allocation recommendation perspective, you can take solace in the fact that you’re probably in the top decile of performance from a MTD, QTD and YTD perspective.



Source: Bloomberg L.P.


Conversely, if you’re in the “killing it” camp this week – which roughly implies the inverse of “top decile” with respect to MTD, QTD and YTD performance (the XOP is up +8.6% over the past two days; God help you if you were long E&Ps on the way down) – our sincere congrats to you as well. We’re all in this together; that’s what makes a market!


Looking to global financial markets through the deft lens of our Tactical Asset Class Rotation Model (TACRM), not much has changed despite the face-ripping squeeze we’ve seen across global equities over the last two-and-a-half days.



Source: Bloomberg L.P.



Source: Bloomberg L.P.



Source: Bloomberg L.P.




  • At the primary asset class level, TACRM is generating “DECREASE EXPOSURE” signals for every asset class except Cash, which is comprised simply of U.S. dollars and volatility. Every primary asset class except Cash has a higher percentage of ETFs with a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading below -1x (i.e. exhibiting a clear trend of negative VWAP momentum across multiple durations) than those greater than +1x (i.e. exhibiting a clear trend of positive VWAP momentum across multiple durations).
  • The Passive Trend Follower Asset Allocation estimations for Fixed Income & Yield Chasing, DM Equities, EM Equities, FX, Commodities and Cash of 21%, 20%, 10%, 3%, 10% and 36%, respectively, are little changed from where they started the week. Recall that this metric is designed to hone in on what asset classes(s) a “macro tourist” might be overweight or underweight by applying a consistent rules-based formula to increase or decrease exposure to a given asset class based on the breadth of momentum at the sub-asset class level. 
  • When looking for developing signals at sub-asset class level, we typically start with our Extreme Momentum Monitor, which highlights the top-20 and bottom-20 VAMDMI readings across the global macro universe of nearly 200 ETFs. Looking to the bottom-20 readings: 10 are EM Equity ETFs, 4 are DM Equity ETFs, 3 are FX ETFs and 3 are Commodity ETFs. That’s more-or-less the same composition we’ve seen in recent months. Looking to the top-20 readings: 10 are DM Equity ETFs (including the IWO!), 7 are Fixed Income & Yield Chasing ETFs, 1 is a Commodity ETF (WEAT), 1 is a FX ETF (UUP) and 1 is an EM Equity ETF (CHIX). That's a little changed from recent trends, but not by much. The full composition can be found in the fourth chart below.
  • Looking to the U.S. equity market, we see that 7 of the top 11 VAMDMI readings are sectors and style factors that are historically strong performers in #Quad4. The other 4 are sectors and style factors that are historically strong performers in #Quad1 (retailers, financials (2x) and small-cap growth). The #Quad4 vs. #Quad1 debate continues. Moreover, 7 of the bottom 8 VAMDMI readings are historically weak performers in #Quad4, including all the usual suspects across the energy and materials sectors. In spite of the bounce(s), nothing has changed from a momentum perspective to the preponderance of investors across multiple durations.
  • Interestingly, homebuilders (ITB) currently have the 10th lowest VAMDMI reading across the 47 sectors and style factors we track across the U.S. equity market. Given our team’s now-bullish fundamental research view on U.S. housing, we would look to this signal as a potential buying opportunity – provided key levels of long-term support remain intact.












All told, not much, if anything, has changed with respect to the domestic and global macro risk matrix over the past few days. In light of that, one has to ask themselves 100-handles higher on the SPX if the coast is truly clear in terms of buying ‘em up here. It was a great trade for anyone who sold the top and bought the bottom, but the critical risk management question you should be asking yourself is: “Is the next 100-hanlde move on the SPX higher or lower from here?”.


We don’t have an answer to that question, but you can pretty much guess which outcome we think is more probable based on the aforementioned signals.


At the end of what has generally been a rough year across the industry, we hope these signals and research views are additive to your process of setting up for a successful 2015. Best of luck out there!



Source: Bloomberg L.P.


***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


(Hedg)Eye-Candy: Survey Says… (12/18)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Moscow, We Have a Problem (12/16)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.

LEISURE LETTER (12/19/2014)



  • Dec 19: CCL F4Q earnings call:
  • Dec 20: Trump Taj Mahal Closing - CANCELLED

Today's Headline Story

Macau DICJ Not Expect GGR Growth Until Mid-2015 – Leong Man Ion, deputy director of Macau’s Gaming Inspection and Coordination Bureau (DICJ), is not expecting year-on-year growth in gross gaming revenue (GGR) in Macau to resume before mid-2015.

Article HERE

Takeaway:  We're currently forecasting a return to growth in September.


FLL – announced, Deborah J. Pierce resigned her role as a Chief Financial Officer of the Company, effective as of December 26, 2014.

Article HERE

Takeaway: Not entirely surprising given the arrival of new CEO Dan Lee.


577.HK – Louis XIII announced Beijing builder Jangho Group Co Ltd Macau subsidiary, Sundart Engineering Services (Macau) Ltd, was awarded a HK$70.5 million (US$9.09 million) contract to fit out the Louis XIII hotel standard rooms, superior suites and corridors. The build-out will occur over the next nine months. 

Article HERE

Takeaway: Progress continues at Louis XIII but no table game allocation to date.


PENN – Live Nation on Wednesday announced a multi-year agreement with Hollywood Casino to become the new name-in-title sponsor of their popular amphitheater located in Maryland Heights near St. Louis. The new venue name is Hollywood Casino Amphitheatre.  In 2014 the venue, formerly known as Verizon Wireless Amphitheater, hosted approximately 400,000 guests.

Article HERE


HOT – announced next year the company will eliminate Internet charges across most of its properties. As of Feb. 2, Starwood Preferred Guest loyalty program members booking through Starwood's brand websites and mobile apps will get free Internet access at "the majority of the portfolio." 

Takeaway: Free internet is becoming the industry norm for loyalty card members


LHO – The Portland Business Journal is reporting the Heathman Hotel was sold to LaSalle Hotel Properties. London-based Taylor-Clark Inc. announced in September it was selling the 150-room, 10-story Heathman Hotel, at 1001 S.W. Broadway, and the 91-room Heathman Hotel Kirkland in Seattle.

Article HERE


PEB – announced that it has acquired the 356-room Revere Hotel Boston Common, an attached 826-space parking garage and an adjacent land parcel for $260.4 million. In 2015, PEB forecasts the hotel will generate EBITDA of $18.0 to $18.5M and net operating income after capital reserves of $16.2 to $16.7M.

Takeaway: This UUP scale hotel traded for forward 14x EBITDA


CCL – 2 new ships

  • Carnival Cruise Line brand with 3,954 berths, scheduled for delivery in March 2018
  • Holland America brand (new Pinnacle class) with 2,650 berths, scheduled for delivery in late November 2018

Article HERE

Takeaway: Carnival Corp now has 10 ships on order 


CCL – Carnival is turning to the Super Bowl to market together – for the first time – all nine of its brands, which include Carnival Cruise Line, Holland America, Princess Cruises, Cunard, Seaborn, AIDA Cruises, P&O Cruises in Australia and the U.K. and Costa Cruises.

Article HERE


NCLH – Norwegian Cruise Line became one of the first major cruise companies to roll out a promotion for Wave Season. NCLH says customers who book a cruise of five nights or longer by Jan. 31 can choose a free Ultimate Dining Package, a free Ultimate Beverage Package or up to $300 in on-board credits. Customers booking a cruise in Europe or Hawaii can choose two of three offers. Under the terms of the Freestyle Choice offer, as it's being called, customers must book an ocean-view or higher category of cabin. Customers booking a suite or a room in the upscale area on Norwegian ships known as The Haven will get all three offers.

Article HERE


Macau Challenges Highlighted as President Xi Visits – a WSJ story reviews the issues facing Macau as the Special Administrative Region attempts to grow and diversify its economy (which until recently was entirely built on gambling) in the face of Mainland money laundering enforcement and attempts to stem the flow of capital out of China.

Article HERE

Takeaway:  Relief rally in the stocks after he leaves?


China Lottery Sales – China lottery sales increased 24.4% to $5.567 billion in November.  Sports Lottery sales rose 31.6% to $2.593 billion while Welfare Lottery sales grew 18.8% to $2.974 billion. Lottery sales were up in 28 provinces and cities in November, the exceptions being Gansu and Liaoning provinces and Beijing, according to the ministry’s data published this week. 

Article HERE

Takeaway:  Mainland lottery sales continue to be robust.


Trump Taj Mahal  – Carl Icahn announced he will "provide up to $20 million of additional financing to keep the Taj operating throughout the bankruptcy proceedings, will also work collaboratively with the State of New Jersey, Atlantic City and the Union to try to forge a global settlement that will bring real stability to the Taj and its employees."

Article HERE


New Orleans Considering Smoking Ban – New Orleans City Council is considering an ordinance to make it illegal to smoke in bars, casinos, parks, at bus stops, work places and other public venues such as the zoo and festivals. Bars, restaurants, video poker outlets, tobacco wholesalers and gambling halls — including the big downtown casino, Harrah's New Orleans — have come out against the measure and vowed to fight it. Businesses that allow smoking worry about a loss of revenues, at least in the short term. Proponents of the ban say studies show business increases over time following a smoking ban.

Article HERE

Takeaway:  Potential negative for Harrah's New Orleans.


South Dakota Free Play Not Taxable GGR – South Dakota Supreme Court ruled free play in casinos should not be subject to state taxation. 

Article HERE

Takeaway:  Good news for the Deadwood Casinos.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. 

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