The propensity to play slots is much higher in Southeastern Asia than China. In fact, there were already slots in Singapore pre-RWS and they knock the cover off the ball.




Long-term margins in Singapore could be a little better than people think due to higher slot play than Macau.  A lot of people do not realize that there are already 76 slot clubs in Singapore some of which have been around for 30 years.  SE Asians are much more partial to slots than Chinese and Hong Kong visitors, which make up the majority of Macau's players.  Here are some fun facts:

  • 76 slot clubs, 71 of which run linked jackpots
  • The slot clubs vary in size from 5 to 40 machines with a total market size of ~1,600
  • Slots are mainly old “fruit style” machines with no machines on a TITO or other cashless systems
  • Payback of approximately 82% vs a legal minimum of 90% for the two casinos


Our Singapore sources indicated that the 1,600 or so slots generate approximately US$800 win per day each.  This compares to very favorably to the Las Vegas Strip at $155 and Macau at $178.  The Integrated Resorts - Resorts World Sentosa (RWS) and Marina Bay Sands (MBS) - will have an estimated 2,900 machines between them, bringing the total number of units in the marketplace to about 4,500. Each of the casinos has a maximum allowed number of 2,500 machines but are not expected to hit this high for the first few years.  The performance of the slot clubs suggests that the market will ultimately support the maximum.


The clubs are currently prohibited from operating the kind of games the casinos will offer. Casinos slots will primarily consist of the 25 and 50 multi-line games, which are much more volatile than the more basic games on offer at the clubs. It's possible that regulations will change to allow the clubs to offer similar games to their loyal customers as the casinos, but in that scenario its likely that they would also need to raise their payback to 90% from the current 82%.  We expect the local market, which has been strong for many years, will move to the IRs, given their better environments, better service standards, and larger mix of games; especially for the high end or VIP slot players.


Singapore is a very different slot proposition to Macau, where there is no history of playing slots and the interest in baccarat is so strong, be it low end mass or high end VIP, that it is not expected that slots will ever comprise more than a small percentage of total revenues.  Singapore however, has a long history of playing slots, and is more akin to the market in Malaysia at The Highlands, which has offered a wide range of games for the many decades they have been in operation. Early indications from RWS are that the limited numbers of machines they have available are generating daily wins per day of US$1,200.  While this can be expected to fall as more machines come online and the aggressive busing from Malaysia diminishes, slots will be a major contributor to the IRs.


Right now, we are projecting slot win per day of only US$400 for MBS, a number which will likely prove low.  Factors working against matching the $800 win per day at the slot parlors include the locals levy of $100, the aggressive busing by RWS from Malaysia, and the supply increase.  See the slot win per day comparisons of various properties/markets below.




The war for topline market share shows no sign of abatement.  Many management teams lament the aggressive discounting environment, yet are faced with no alternative but to comply.  Favorable food costs made this strategy largely accessible in 2009, but 2010 may be a different story.


Operational cost pressures are relatively benign for restaurant operators at present.  However, starting in the third quarter, QSR chains will face significantly more difficult compares in food and labor costs.  The chart below illustrates how QSR food costs are set to place increasing pressure on margins as 2010 rolls on.  Additionally, the CRB Foodstuffs Index is trending upwards.  Although the 4Q09 year-over-year change in the Index is 15.7%, the index troughed in 2Q09 and we expect food costs to be of little help to QSR earnings in 2010, particularly in the back half of the year (as commodity contracts are renegotiated).






Labor costs have historically increased and this trend is not expected to reverse any time soon.  Healthcare premiums have been rising and, while healthcare is front and center in Washington, D.C. at the moment, President Obama has made his support known for labor-related legislation such as the Employee Free Choice Act.  The trend of unionization poses a threat to the QSR industry, as we discussed in our 1/14/10 post, “QSR: DON’T MESS WITH MACRO”.  As the chart below indicates, labor costs as a percentage of sales also troughed in 3Q09 for QSR chains.  This implies a difficult compare for QSR labor costs in 3Q10.




Accordingly, EBIT margin trends are also reflecting the difficult scenario facing QSR in 3Q10.  Margins rose 295 bps in 3Q09 year-over-year and 226 bps in 4Q09.  Examining the food and labor trends, and taking into account the magnitude of the cost-cutting measures undertaken in 2009, it is clear that earnings growth is going to be far more tightly linked to top line trends in 2010 than in 2009.



QSR – A LOOK AT SALES AND MARGIN TRENDS IN 2010 - qsr ebit margin


Top line trends in the QSR segment have been showing weakness lately, partially caused by weather, but significantly driven by the issue of unemployment.  Unemployment is being cited as an issue by most management teams.  Some operators, such as Jack in the Box, have underlined the endemic levels of joblessness among certain demographics (young males, young male Hispanics).


The discounting environment persists as companies compete for traffic.  Even as BKC’s scheduled step-down from the $1 double cheeseburger approaches, MCD’s decision to sell all fountain drinks for $1 for 100 days from Memorial Day indicates that there will be no cease-fire in the QSR discounting war in the near-future. 


The chart below shows the steep drop in QSR same-store sales that began meaningfully in 2Q09.  The bifurcation of comps and margins shows that last year’s performance was driven by lower food costs and cost-cutting initiatives; this year, in the absence of an unlikely surge in same-store sales, the margin compares will negatively affect earnings in the QSR segment.  So far in 2010, weather has been affecting comps and the stock performance has been strong; though the FSR segment continues to outperform.  However, I expect margin compares to challenge QSR earnings growth from here – particularly in the third quarter.





Howard Penney

Managing Director


There are three data points on housing today:


(1)    CNBC is flashing breaking news - “Geithner: It will take a long time to heal damage from the housing crisis”

(2)    KB Homes reports earnings numbers that do not support a housing recovery. 

(3)    Existing home sales are at the lowest level in eight months.


If the housing recovery story is not working with significant government support in place, when is it going to work?


A picture of the housing "recovery" (or lack thereof) is shown in the two graphs below - supply and demand.  We have also included a six-month moving average to remove some volatility of late to see the trends more clearly.  Regardless of volatility, existing home sales have stagnated and the supply of new homes is starting to grow again.   


Today, the NAR reported that sales of existing U.S. homes fell 0.6% in February, declining for a third month.  The 5.02 million annual rate reflects the lowest level in eight months and is significantly below the 6.5 million annual rate seen in 2H09. 


Importantly, the number of previously-owned homes on the market jumped 9.5% to 3.59 million.  At the current annual run rate, the month’s supply moved to 8.6 months from 7.8 months last month.


We have been cautious on the housing recovery story and today’s news provides no evidence to change our stance.  The Consumer Discretionary (XLY) is up 8.4% over the past month (the best performing sector in the market) and the housing names have significantly underperformed.


There is basically one month left for consumers to qualify for the current government housing support program.  Given the lack of consumer acceptance for the current program (weather related issues or not), it is hard to see a light at the end of the tunnel for housing.


Howard Penney

Managing Director






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 80.46%
  • SHORT SIGNALS 78.36%

3 Takeaways from Timmy today



The Geithner portion of the GSE hearing just ended. I was able to listen in for about 75% of the hearing. Here were the takeaways I found interesting.

  • Geithner says it’s not realistic to abolish the GSEs now or at any time in the future.
  • Geithner supports the idea of having an independent agency oversee consumer protection and thinks it’s a terrible idea to put consumer protection within the Fed, as the Dodd bill now proposes.
  • Geithner was asked by Rep Scott Garrett (R-NJ) whether GSE is Sovereign Debt, and he squirmed just like Bernanke did when asked the same question. Ultimately, Geithner said “GSE debt is not sovereign debt, but it is debt that the United States is going to stand behind”. Sounds like having your cake and eating it too.

Joshua Steiner, CFA
Managing Director


Another strong quarter by CCL and favorable forward commentary.

"We have enjoyed a very robust wave season, setting booking records during the quarter. Wave season bookings were fueled by attractive pricing in the marketplace and pent-up demand from those who postponed vacations last year. As a result, pricing continues to increase, particularly for the peak summer season. Having achieved significantly higher pricing, we expect revenue yields for the remaining three quarters of the year to increase approximately 3 to 4 percent (in constant dollars) compared to last year. Vacationers should take advantage of the current low rates now as prices are going up."

- Carnival Corporation & plc Chairman and CEO Micky Arison




  • "Since the start of the calendar year, booking volumes for the remaining three quarters are running ahead of the prior year with prices significantly higher than last year's discounted levels.  At this time, cumulative advance bookings for the remainder of the year are in line with last year at higher prices."
  • 2010 Guidance:
    • Net revenue yields, on a constant & current dollar basis:  +2 to 3% percent compared (up 2% from prior guidance)
    • Net cruise costs excluding fuel per ALBD, on a constant dollar basis: -2 to -3%  (down 1% from prior guidance)
    • Fuel costs are expected to increase $483MM, costing an additional $0.60 per share
    • Strengthening of the U.S. dollar since the December guidance is expected to reduce earnings by ~$85MM
    • EPS: $2.25 to $2.35, up $0.05 to $0.15 from compared to December guidance (Consensus is $2.23)
  • 2Q2010 Guidance:
    • Net revenue yields (constant dollar basis):  +1 to 2% percent compared (2.5 to 3.5% on a current dollar basis)
    • Net cruise costs excluding fuel per ALBD, on a constant dollar basis: -3.5 to -4.5% 
    • Fuel costs are expected to increase $176MM, costing an additional $0.22 per share
    • EPS: $0.26 to $0.30 per share (Consensus is $0.26)


  • Better revenue yields due to better expected pricing on last minute bookings and better cost controls
  • Capacity increased 9.6% for the fourth quarter of 2009, with the majority of the increase once again going to our European brands. Our European brands grew 14.5% while our North American brands grew 5%. As I previously mentioned, overall net revenue yields in local currency declined 2.3%
  • Net ticket yields saw 4% in local currency.  North American was down across all itineraries.  European was down 6% - primarily due to Brazil - which had large capacity increases
  • Net onboard and other increased 3%, however, excluding some unusual items onboard would have been flat - and that's what they are assuming for the rest of the year
  • Expect the sequential improvement that they saw in the first quarter to continue through the rest of the year
  • Rising fuel prices masked good cost controls. However, fuel consumption per ALBD decreased over 3%
  • During the last 9 week period, bookings are up 9% and pricing is up 17%. North American up 23% and European pricing is up 6%
  • North American brands (3% increase for balance of 2010), Alaska pricing is showing some improvement. All itineraries are showing improving yields. Seabourn - is forecasting lower yields but they will experience 57% capacity
  • Europe: Costa and AIDA pricing is expected to be slightly lower for the year given the capacity increases, the rest is expected to be flat. Ibero cruises is expected to have stable yields for the rest of the year despite challenges in the Spanish economy
  • 2Q2010 Guidance: 8.3% increase in capacity for 2Q2010. 13% in European brands, 4% in NA. Forecasting local currency yield increases of 1-2%.  North American: 53% Caribbean. NA brand pricing is slightly higher - by 2% with very little left to sell.  Europe: 57% in Europe.  Pricing is slightly lower, with very little less to sell, occupancies down a little too.
  • 3Q2010 Guidance:Capacity up 6.2%, 3.2% in NA and 8%in Europe.  Fleetwide occupancies are higher across the board. NA capacity: 40% Caribbean. Pricing and is also higher for virtually all itineraries.  Only slightly higher in Alaska - with their tour business down.  Forecasting significantly higher yields in NA (high single digits): Ticket revenues - low double digit increases while onboard and other is forecasted to be flat.
    • Europe: Forecasting flattish to slightly lower local currency yields given the sluggish economy and capacity increases.  
  • 4Q2010: NA brands: 50% in Caribbean, 20% in Long and Exotic.  Pricing is higher in all itineraries but occupancy is a little lower. Europe: 73% in Europe.  Occupancy and pricing is higher in Europe.  Forecasting that yields will be nicely higher in the 4Q.


  • .75% benefit for the $19MM settlement in the 1Q2010 on yields
  • What changed with regard to cost guidance?
    • About half of the change has to do with the gain on the sale of P&O Artemis
    • The other half is just savings across the board... sounds like they sandbagged on cost guidance in Dec
      • Basically operating companies tend to underestimate their ability to reduce costs
  • Alaska head tax issue (governor is proposing a repeal)
    • If the proposals pass, then they would give passengers onboard credits which will hopefully increase onboard spending. It won't pass in time to impact this summer season through
    • The session only has 4-5 weeks left to run, and if the governor's proposal doesn't pass then it won't pass this year
    • Their itineraries are in place for 2011 (not sure what the competitors are doing)
    • Alaska is 15% of overall capacity in 3Q
  • Europe- they don't have the Brazil business for the rest of the year, only in 1Q.  So their forecast for the rest of the year is consistent with the current down 1% yields, ex Brazil that they saw this Q.
  • In the UK they've been very pleased with the business. 
  • Seabourn is their highest priced product and they are taking capacity from 600 beds to 1500 beds, and that capacity will take some time to absorb.
  • The guarantee items aren't necessarily 1x items.  It's just that all the reconciliations are done every year in January. In good years they never kick in so they are irrelevant.
  • Holland and Princess both made strong comebacks that are close in actual #s
  • Are forecasting a 1.5% decrease in fuel consumption - but they will likely beat that number
  • Selling and building new ships? What are they seeing on pricing
    • Working on the Princess deal for a long time - taking 2 years.  Hope that final contracts will be signed by April. Not working on any other deals - so it'll take a while before you see anything else.
    • Prices to build are more attractive now. Even a 10-15% decrease in pricing isn't going to make them build ships they don't need.  Probably will add 2-3 ships per year in the long term
  • Historically, when they give guidance, the next quarter is usually 85-95% booked, and the following 55-75%, and the 3rd 30-50% booked. 
  • They baked in the litigation expenses when they gave guidance in December, but not on the taxes.
  • The timing of some expenses is difficult to predict - especially in SG&A.  Some expenditures were pushed out to further quarters, hence 1Q was lower than normal.
  • Onboard spend in the EU vs. NA brands. EU brands still have lower onboard spend than the NA. They drink more and gamble less than NA.
  • Thoughts on reimplementing fuel charge
    • No present intention to reinstate it
  • They are not seeing any changes in booking windows. They are purposefully waiting to book a little closer in to try to get pricing.  Booking curve is similar to what was in 4 of the last 5 years, with the exception of 2008.
  • They are surprised by the strength of pricing so far this year.  Things are coming back a lot faster in NA but Europe is slower. They still offer the best "value" vacation out there
  • Commissions and passenger yield costs? Why were they down so much?
    • Air / Sea mix was down 25%.  Only 12% of people purchased air from them this year vs. 16% last year (and that's a pass through expense).
  • Why are they guiding flat onboard spend? Is it the mix shift with Europe?
    • Partly Europe, but operating companies are typically conservative because they have no visibility.  In theory, higher ticket prices should indicate an increase in onboard spend- but they have no visibility there.  People are also spending differently - like casinos - which have become so prevalent on land that they are less popular onboard. There is also a seasonality issue - since Europe is more seasonal than the NA business
  • They had a $0.25 swing in total impact due to fuel & currency -both fuel and currency moved against them. 10% on fuel is still $0.20 on earnings
  • How sustainable are these cost declines? Will you see a big rebound when things get better?  Think that they are getting more bang for the buck on advertising.  Search costs declined because they won the use to their trademarks on Google. They are just becoming more efficient on their ad spend.  Also it's hard to predict inflation, right now there is no inflation. 
  • Is there a structural impediment to getting yields above 30%?
    • Not on the cost side
  •  They may hedge Brazil with more capacity from Argentina
  • Continental European brands focus on an upper-middle market, can't say if the premium customers are doing better there

In Search of a Binding Agent

Position: Long UUP; Short MUB and HYG


Ahead of European leaders meeting in Brussels this Thursday and Friday for an EU Summit, the media frenzy continues to beg for guidance on how Europe and/or the international community will respond to Greece’s sovereign debt issues.  However, if German Chancellor Angela Merkel has her way—and she recently said there’s no need for EU leaders to make any “concrete decisions” on Greek aid at the Summit—we’d expect to see continued volatility in markets deemed to have sovereign debt issues, and carry-over weakness in the EUR versus the USD.    


With respect to the work we’ve done outlining Sovereign Debt in recent weeks, both at home and abroad, we recently came across a great chart from Stratfor (first chart below) that outlines unit labor costs across Europe, including the US as a frame of reference. What the chart helps quantify is one of the many metrics that demonstrate the uneven nature of Eurozone countries, in this case regarding labor efficiency, or lack thereof in terms of the PIIGS. Note the ~ 25% spread between Germany and Greece.


While we don’t have a crystal ball to predict how this will all end, we’ve positioned ourselves in our model portfolio to take advantage of, or steer clear of, some of these macro moves.  We’re long the US dollar (UUP), a proxy for taking advantage of EUR weakness; short US municipal bonds (MUB) and short high yield corporate bonds (HYG).


The second chart below of Greece’s 10YR bond yield and Greek 5YR CDS prices demonstrates that heightened fears surrounding Greece (and the PIIGS) persist, even post PM Papandreou’s global road show to garner economic support earlier in the month.  You’ll note that we covered our tactical short position in Spain (via the etf EWP) at an oversold level on 3/22, which coincided with a lower high in Greece’s 10YR yield. 


Matthew Hedrick



In Search of a Binding Agent - gfor


In Search of a Binding Agent - Gnoch


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