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Back ended guidance of a 2010 yield recovery is disappointing following RCL's commentary of positive yields in 1Q2010 and a strong CCL run into the quarter.



1Q2010 guidance of constant dollar net revenue yield declines of 3-4% and EPS of $0.08-$0.12 is below consensus estimate of $0.17.  Full year 2010 EPS guidance of $2.10 to $2.30 compares to consensus of $2.32.  Here is the transcript from the call that just ended.




  • 4Q09 came in above the mid-point of guidance driven by stronger on board revenue trends, better close in pricing on ticket sales, better net revenue yields and deeper cost savings
  • Net ticket yields NA where down 17% and European brands declined 9%. There were declines across all ships
  • Net on board and other yields declined 5.7%.  European brands saw less declines than NA brands
    • Saw an increase in shops and photos for the first time this year
    • Saw sequential improvement in on board spend
  • 2009 capacity increased by 5.4%
  • Were very pleased with the European brands performance, which contributed 49% of operating income despite only being 33% of capacity.  Decline in yields was relatively mild despite an 8% capacity increase
  • Outlook for FY 2010:
    • Will continue to look for more cost cutting opportunities
    • Fuel and currency are driving their costs, and therefore costs are expected to be up 4-6%, but currency will also increase topline by the tune of 8 cents per share at current spot
    • Cruise capacity will increase 7.7%; 3.3% to NA brands and 11.9% to European brands
    • With continued strength in booking levels, on a capacity adjusted basis, occupancies are flat to last year
    • Pricing for cruises still hasn't recovered as much as they'd like but in selective areas they have been able to raise pricing (premium brands for example)
    • Pricing for all itineraries other than Mexican Riviera pricing have been up y-o-y over the last 13 weeks. Although Mexican Riviera pricing looks to be stabilizing
    • European brands are absorbing 12.2% capacity in the first 9 months of 2010, pricing is a little lower on a local currency basis but up on a US dollar basis. Continental Europe has a 19.4% capacity increase in the first 9 months of 2010
    • Brazil cruise pricing has been weak given capacity additions
  • 1Q2010 Guidance:
    • Topline is expected to increase 10% due to capacity additions
    • Current dollar cruise costs are expected to be up 1-2%
  • Beyond 1Q2010, fuel comparisons should become easier and higher recent ticket prices should have a positive impact
  • 1Q2010:
    • 9.9% capacity increase; 5.3% in NA
    • Occupancies flat, slightly higher in NA and slightly lower in Europe
    • Have very little inventory to sell
    • Pricing for NA Caribbean pricing is down moderately with Mexican Riviera down more.
    • European brands: capacity; 17% in SA and 11% in Asia.  Caribbean pricing is down moderately and down materially in South America
  • 2Q2010:
    • 8.8% capacity increase; 14.4% in Europe
    • 56% of NA capacity in Caribbean with pricing slightly lower than a year ago and Mexico is lower
    • Combined pricing for NA brands are running slightly below a year ago, but because current pricing is ahead they are forecasting higher pricing
    • European brands pricing is modestly behind year ago levels
    • UK brands are showing pricing ahead, but Continental Europe pricing is running ahead.  Expect flat pricing by the time the quarter closes
    • They expect prices to be flat in local currency
  • 3Q2010:
    • Early indications for pricing are positive
    • NA capacity 43% in the Caribbean, 25% in Alaska
    • Pricing on NA Caribbean pricing is lower but occupancies better, Alaska pricing lower but occupancies better
    • European Brands are 97% in European itineraries, pricing is running behind last year but occupancies are running flat with last year on an occupancy-adjusted basis


  • FY 2010 NA yields would be up 2-3% and why is FY2010 guidance so conservative given the quarterly guidance?
    • Will gradually improve yields each quarter, that's just how the numbers work - they're not sandbagging
  • How has Oasis affecting their pricing strategy for 2010?
    • Hard to quantify how they are being impacted.  Same thing with Norwegian's Epic.  Their bookings for the summer are holding up well
    • Seeing no impact, if anything they are getting more media exposure for cruising
  • Cost outlook is relatively flat excluding the dry docking impact
  • Ordering another ship for the Princess brand... will the yard take the currency risk?
    • Haven't completed the negotiations. They are willing to take a certain level of Euro exposure given thier business in Europe and can always hedge it
  • Premium brand comeback - saw evidence last quarter that it was booking stronger and ability to raise prices.  Continued throughout the 4th quarter.  The equity market recovery helped.  Thinks that the recovery will be faster/stronger than historical recoveries given the deeper drop
  • Booking curve: where they are for 2010 bookings are consistent with historical averages sitting in December with the exception of 2008.  Saw a little bit of an improvement in the booking curve this quarter
  • On-board spending did see a sequential improvement.  2010 forecasts assume flat spending to current levels
  • Are they going to reconsider hedging fuel?
    • Hedging is a short term fix and they can also charge a fuel supplement
  • Mix change due to less Alaska exposure.  As they move the Alaskan ships to other markets will that depress pricing since Alaska is a premium market?
    • Think that the ships will do better from relocations and the higher pricing tickets are offset by higher operating costs
    • One ship is going to another brand, another is going to Europe which also has high pricing
  • Where are they getting price increases?
    • Everywhere is doing better but Mexican Riviera and Brazil
  • As the business improves which areas will they target for reinvestment?
    • Port infrastructure is the only area outside of new ships that they have been investing in and they are very minor investments compared to cruise capex
  • 1Q2010 yield guidance is influenced by what they have on the books now and the little inventory they have left to sell
  • Are they hearing about any other new ship order discussions?
    • they are aware of some other ongoing discussions but lower than historical levels
    • 2013-2014 should have significantly less capacity increases
  • Interest in acquiring existing ships
    • not looking at anything now
  • Will discuss the dividend during the board meeting in mid-January, and will make an announcement shortly thereafter
  • European pricing strategy:  was pricing more aggressively early on in the booking cycle given the huge capacity increases.  Also the prices in Europe haven't dropped as much as US
  • Returns are better in their European business than the US business hence the shift of ships to Europe
  • 4th quarter booking trends are the best indicator for wave season.  They are optimistic about wave season
  • Too early to give guidance on 3Q2010 yields.  3Q2010 is most skewed towards Europe and will have difficult comparisons


Last night DRI reported significantly better 2Q10 EPS of $0.43 versus my $0.39 estimate.  As I said in my preview note, “the extent to which commodity costs prove favorable on a YOY basis is the biggest question mark and could provide some upside to my numbers.”  With comparable sales coming in slightly worse than my expectations, the earnings upside did, in fact, come largely from lower food costs.  My concerns for DRI and the industry in general are grounded in top-line demand and were well placed as it relates to the quarter DRI just reported. 


Reported same-store sales declined 1.4% at Olive Garden, 8.4% at Red Lobster and 6.2% at LongHorn Steakhouse.   Relative to my expectations, these results are in-line at the Olive Garden, worse at Red Lobster and better at LongHorn.  These results include the impact of a shift in the Thanksgiving holiday week, which moved to the fiscal second quarter this year from the fiscal third quarter last year.  Excluding the effect of the holiday shift, U.S. same-restaurant sales decreased 0.7% at Olive Garden, 7.6% at Red Lobster and 5.0% at LongHorn Steakhouse. 


Darden announced that it expects reported diluted net earnings per share growth from continuing operations of flat to +4% in fiscal 2010 versus the previous guidance of -2% to +8% (said last quarter that the lower half of the diluted net earnings per share range is more likely than the upper half of the range).


While the expected range of earnings in fiscal 2010 is slightly better, the top-line trends continue to slow for DRI with the company lowering its full-year blended same-store sales guidance range to -3% to -4% from flat to -3%.  Going back to my industry note from 12/01/09 titled “CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS,” the market is not paying up for slowing sales trends.  DRI’s full-year earnings outlook is better than the company anticipated in September due to lower food costs, but our Restaurants 2010 double-edged sword thesis suggests that this will come to an end sooner rather than later. 


China's Art Of Risk Management War

"Can you imagine what I would do if I could do all I can?"
-Sun Tzu
Sometimes it is best to use the wisdoms of others to make my point. In the Art of Risk Management War, taking one man’s word for it has serious risk.
This morning, take the ancient Chinese military General’s heed of caution seriously. The Chinese government could absolutely devastate a lot of what is holding US bond and equity markets together. They own America’s debt. They are the driver of global demand.
No, I am not one of these perpetual China bears who are waiting for their broken clocks to be right on another “crash” that they “called”, irrespective of being squeezed for +130% up moves at a time. There are these two little stubborn critters called TIME and PRICE that I get paid to get right.
For the last month I have been on the road warning clients that Chinese economic growth is setting up to slow sequentially in Q1 of 2010. The only confirmation biases in my forecast are real-time, marked-to-market, prices. In China’s Art of Risk Management War, prices don’t lie – people do.
On that score, here are some fresh prices to consider this morning:
1.      China’s Shanghai Composite closed down another -2.1% overnight, registering its 4th consecutive session of declines

2.      China’s Shanghai Composite broke my immediate term TRADE line of support yesterday – that line = 3252

3.      China’s Shanghai Composite has lost -6.5% since December 7th, and is down -10.3% since August 4th

4.      Hong Kong’s Hang Seng Index was down another -0.8% overnight, and has lost -7.7% since November 16th

5.      The Shanghai Property Index was down -5.4% last night and has lost -26% of its value since the July 2009 peak

6.      Poly Real Estate (China’s 2nd largest property developer) got clocked last night, losing another -7.5%

Altogether, I call these sub components of data “risk factors.” All prices are leading indicators that tell me something. My challenge, every morning, is to delineate what factors are mutually exclusive local market risks, versus those that are correlated, all encompassing, global market risks.
So, combined with what I know from a fundamental research perspective, what do the aforementioned risk factors tell me?
1.      There is a credit bubble in China

2.      Credit bubbles are perpetuated by debt levered asset price speculation

3.      Asset prices in property speculation eventually pop

4.      Eventually, that popping permeates broader market indices

5.      Local markets figure it out first

6.      Global markets follow the locals

In this analysis, it’s important to recognize that he H-shares (Hang Seng) are institutionally traded, whereas the Chinese A-shares (Shanghai Composite) are more individually traded. Follow the puck here folks. The local property share index peaked in July. Then the local A-shares index peaked in August. Then the global, institutionally-traded H-shares didn’t peak until November!
All the while (particularly in recent months), the Chinese government has become explicit in its warning global investors of price bubbles. But (big but here), with one caveat – AFTER the locals sold the highs! Can you imagine what these guys would do if they told us what they are doing with their US Treasuries and local Chinese stocks, real time? Watch what your competitor does, not what they say. This is China’s Art of Risk Management War.

So back to the point that I made earlier that the Chinese government could devastate US capital markets. The reality is that they don’t get paid to do that. But they do get paid to pay themselves first.
The H-shares in Hong Kong broke their intermediate term TREND line this week. Whenever immediate term TRADE and intermediate term TREND lines break, that’s bad. Sometimes, really bad.
I beat myself up for missing the US stock market high that was established on December 14th. I felt shame for a day, then I moved on. The question I am asking myself now is, did I mark my own top?
So far, the answer to that is yes. The SP500 is now down -1.6% from its YTD peak. Some other questions for me now are: 1. will the SP500 be the last to get the global risk management memo? And 2. Will US markets lag Hong Kong, which has lagged Shanghai?
The SP500 broke my immediate term TRADE line of 1101 yesterday. That was my line of support. Now it’s resistance. The intermediate term TREND line for the SP500 is down at 1068. I’ll be a seller of strength today.
Have a great weekend and best of luck out there today,

VXX – iPath S&P500 Volatility For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

EWZ – iShares BrazilAs Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.

XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

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.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.

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

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The Macau Metro Monitor.  December 18th, 2009



OCEANUS ELEVEN destination-macau.com

While the opening ceremony of Oceanus was anticlimactic due to the rain, the property was well-received.  DM believes that Oceanus will be good for SJM but doubts that it will be a game-changer, as many predict.  Despite the view that SJM dominates the “high-margin” mass market, with a 42% share, Venetian and Wynn make far more money from mass business when you strip out marketing costs (what SJM has to pay back to its third-party partners). 



SANDS OF TIME destination-macau.com

Marina Bay Sands has been allowed more time to open its integrated resort by the Singapore government.  The message from the government suggests that MBS can take up to another 12 months to finish the project without major repercussions related to the opening date.  However, the government has the open-ended right to determine if MBS should be punished for being “reckless” or “negligent” in its development.


In contrast, DM envisages a situation in Macau within the next 18 months to two years where Sands China is on track to reach a 1:1 debt-cash position, while throwing off more than US$1.5 billion in annualized EBITDA.  DM questions why anyone would want to be invested in LVS rather than Sands China.



MPEL AND ALTIRA: WHAT’S GOING ON? destination-macau.com

Altira’s rolling-chip volumes cratered last month.  COD’s were not very impressive either.  It seems that players are moving back to SJM properties.  This would support what we have been hearing, which is that MPEL is phasing Amax out of its consolidator role at Altira in order to comply with the commission cap, which was being put before the concessionaires last month.  MPEL is making more of an effort to promote Altira as a high-end luxury property to direct clients.  The following narratives are being circulated at present:

  • Altira is going to be sold to SJM at a knockdown price
  • MPEL is going to be sold to SJM at a knockdown price.  Altira’s numbers are dropping to ensure the knockdown price
  • SJM will take Macau Studio City and Altira as third-party casinos under their umbrella, and MPEL will be left with just COD.  Some cash will change hands so that MPEL can pay down debt and avoid covenant breaches in September 2010

An announcement this week that MPEL is asking its creditors to amend the covenant is the only event that would give any credence to these rumors. 



The Macau Legislative Assembly approved the 2010 budget, which projects total revenues of MOP52.422 billion (US$6.56 billion), a rise of 9% compared to the 2009 budget.  In terms of “income from gambling and other casino games”, the government expects 2010 will bring MOP33.8 billion, or MOP5 billion more than in 2009. 


Yet another new market may be emerging. The Brazil potential is huge, and real.



For investors willing to stomach some bumps in the road in 2010, gaming supply could be the best growth segment in all of leisure land.  Brazil is our latest focus, adding to a long list including Illinois, Ohio, Maryland, Kansas, Italy, Singapore, and even Spain.


Rumblings about Brazil legalizing gaming surfaced during G2E but the investment community seems to know very little.  We did some research and we are encouraged.


Casinos have been illegal in Brazil since the 1940's and gambling is punishable under the 1947 Criminal Convention Act.  Prior to President Lula da Silva shutting down the country’s gaming halls in 2004, there were roughly 60,000 gaming machines primarily concentrated in larger cities. 


The proposed legislation, Bill No. 270/03, would legalize licensed bingo and electronic gaming machines and allow for the emergence of gaming parlors with 20-40 devices in some of Brazil's larger cities and a maximum number of 75 devices per location in Sao Paulo.  All slot machines would be required to be connected to a central server, which would be overseen by the Ministry of Finance.  An earlier draft included ten casino resorts but the provision for full fledged casinos is not included in the current bill.  Other details of the proposed Bill 270/03 include:

  • Payout ratio equal to or greater than 80%
  • 17% tax on gaming revenues
  • Maximum of 3 bingo hall licenses per each license holder

In mid-September 2009, a draft version of Bill 270/03 passed in the Chamber of Deputies by a 40-to-7 vote.  The Bill is now awaiting debate and vote in the lower house of the Brazilian Congress.  While the Bill was given the green light to go to floor a few weeks ago, it appears that the debate has been delayed because of a provision dealing with the retirement age of public servants that was tacked onto Bill 270/03.  With the Christmas holidays approaching next week, it’s unlikely that anything gets passed this year, but the bill probably has a decent chance of passing as long as a vote takes place in advance of the October 2010 Presidential election.  Should the Bill pass in early 2010, we could see as many as 40,000-60,000 units shipping into that market. 


Similar to the gaming expansion in Italy, legalized slots in Brazil would be huge for WMS and BYI and additive to IGT.  As we wrote about in our 11/25/09 post, "ONE IN THE HAND IS WORTH TWO IN THE BUSH", analysts may be overestimating 2010 unit sales given the sharp drop off of new/expanded casinos.  However, looking past a potentially choppy 2010, we can see a pretty strong growth pipeline for the slot companies.


Yesterday, the Research Edge QUANT models flashed the S&P 500 breaking the TRADE line on big volume.  Also, Consumer Staples (XLP) and Materials (XLB) broke the TRADE line, joining Energy (XLE) and Financials (XLF).  The XLF is the only sector broken on both TRADE and TREND.  We continue to favor the low beta sectors of Healthcare (XLV), Utilities (XLU) and Technology (XLK).


The Dollar index is up five of the last six days and 2.2% over the same time period.   Until yesterday the S&P 500 was resisting the gravitational pull of everything priced in dollars going down as the dollar rallied.  Although the Dow finished lower by 1.3% yesterday, the index is now down for the fourth straight day. 


The fact remains that the FED is behind the curve and the strong dollar is communicating that message.  There were a number of headwinds at work today, highlighting the pickle the FED is in.  The economy has improved from a crisis levels, but how can the FED raise rates with the consumer struggling and there be no clear path to better times?


Yesterday Initial jobless claims rose to 480,000 for the week-ended December 12th, ahead of consensus expectations for a decline to 465,000. Continuing claims rose 5.2M following a big decline last week.  However, the four-week moving average fell to 468,000 from 473,000, its lowest level since September 2008.  While yesterday’s jobless claims number is a small step backward from the past three weeks, it’s a step backward nonetheless.


The Financials (XLF) continue to underperform and it feels like another bubble is bursting.  The XLF underperformed the S&P 500 by 70bps yesterday and nearly 1000bps over the past three months.  While Discover (DFS) led the group down, the banks and brokers were the real problem.  The bulk of the focus was Citi (C) and its inability to price a massive secondary offering.  The pricing of C was so bad that “Timmy” did not want to take a loss on “our” position.  


The Materials (XLB) was the worst performer yesterday, with much of the damage stemming from a spike in the dollar.  The Chinese appear to be flexing their muscles as it relates to a new potash contract.  It’s now widely expected that the new contract price will be lower than the current global spot price. 


From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below.  The range for the S&P 500 is 12 points or 0.5% upside and 0.5% downside.  At the time of writing the major market futures are trading higher.


In early trading crude oil rose in New York and is poised for its biggest weekly gain since October on optimism demand will increase amid improved prospects for a global economic recovery.  The Research Edge Quant models have the following levels for OIL – buy Trade (69.66) and Sell Trade (74.30).


Gold is trading 0.2% higher at $1,101.41 an ounce in Singapore after yesterday it dropped the most in almost two weeks.  Spot gold fell below $1,100 yesterday for the first time since Nov. 10.  The Research Edge Quant models have the following levels for GOLD – buy Trade ($1,097) and Sell Trade ($1,151). 


Copper fell 2.4% yesterday, the most since Oct. 30th.  Although copper is still up 1.1% this week after better-than expected U.S. housing data. China’s imports recovered from a nine-month low amid a drop in domestic inventories. The Research Edge Quant models have the following levels for COPPER – buy Trade (3.13) and Sell Trade (3.26).



Howard Penney

Managing Director














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