"We were encouraged to see revenue yields turn positive for the first time since late 2008. Improving revenue yields combined with an 8 percent capacity increase and ongoing cost control efforts offset significantly higher fuel prices. Advance bookings are holding up reasonably well and remain in line with our expectations. We believe this will lead to earnings growth in both the third and fourth quarters. The summer season, which is our strongest and most important quarter of the year, is shaping up particularly well.”

- Micky Arison, Carnival Corporation & plc Chairman and CEO




  • Since March, booking volumes for 2H2010 have been running slightly ahead of the prior year at higher prices.
  • 2010 Guidance
    • Net revenue yields (constant dollar):  +2 to 3% (unchanged from previous guidance)
    • Net cruise costs excluding fuel per ALBD (constant dollar): -2.5 to -3.5%  (- 0.5% from prior guidance)
    • EPS: $2.25 to $2.35 (unchanged guidance, Consensus is $2.31)
    • Fuel costs: increasing $440MM YoY or $0.55 per share (previous guidance: $483MM or $0.60 per share)
  • 3Q 2010 Guidance
    • Net revenue yields (constant dollar): +5 to 6% (0 to 1% on a current dollar basis)
    • Net cruise costs excluding fuel per ALBD (constant dollar): 1 to 2%
    • EPS: $1.43 to $1.47 per share (Consensus is $1.50)
    • Fuel costs: increasing $74MM YoY or $0.09 per share


  • Volcano ash disruptions impacted yields by half a point
  • Capacity for European Brands grew 13%; NA brands grew 4%
  • Net onboard/other revenues yield: increased 3.1%
  • Given 2Q performance, onboard & other revenues yields expected to increase sequentially for reminder of the year.
  • Decline in ex. fuel net cruise cost per ALBD attributed to lower dry dock expenses, economies of scale, a low inflation environment, and timing of SG&A expenses
  • Fuel consumption per ALBD declined 3.3% in 2Q
  • $39MM charge for British pension fund drove down 3Q projections for net cruise cost excl. fuel ALBD.
  • Double-digit price increases in NA;  strong volumes for Caribbean; Alaska had lower booking volumes but higher pricing and low levels of inventory remaining
  • European: booking volumes strong with little remaining inventory
  • For last 6 weeks overall bookings are up YoY. With NA brand trends trailing those of Europe.  European consumers seem more resilient to geopolitical and economic risks
  • For 3Q
    • fleetwide capacity up 6.3%
    • Pricing in Mexican Riviera is improving
    • Expect pricing to be flat in for European brands
  • For 4Q
    • fleetwide capacity up 6.1%, up 1.7% in NA, and up 10% in Europe
    • occupancy slightly lower
    • European brands local pricing will be higher YoY.
    • revenue yields should be up 3% in current dollars
    • North American brands in the fourth quarter are 50% in the Caribbean with all other itineraries individually below 10%.
    • European brands are 73% in Europe in the fourth quarter with all other itineraries individually under 10%.
  • For 1Q 2011:
    • Overall, pricing higher YoY; occupancy slightly behind (similar to 4Q 2010 trends)
    • Caribbean pricing: higher prices on higher occupancy; same with Mexico Riviera.


  •  For 4Q, surprised at lower occupancy YoY?
    • Bookings pace is good without giving away any price, less concern on occupancy; pretty confident on yield guidance; pace has picked up up since a hiccup in May. Focused on getting better pricing.
  • Bookings trend since close of 2Q:
    • All categories except for casino were up in 2Q; expect trend to continue for rest of year.
  • Pension charge in 3Q: has been in guidance since December--may have been changed by a few million though
  • Gulf (Florida)/ Southern Europe bookings trend:
    • Gulf cruises unaffected by oil spill; slight increase in fuel consumption; no slowdown in booking pattern
    • Italy market: no change in demand; "Europe is performing fantastically"
  • Low bond yields, refinancing in future?
    • 7 export credits--even lower yields than most bonds; not interested in refinancing at this time.
  • Advance bookings breakdown:
    • As we get bigger in Europe, business will be more seasonal; lower earnings in 1Q and higher earnings in 3Q for European business
  • New build and domestic brands:
    • two orders for Carnival cruise line and two orders for Princess
    • plenty of capacity coming for NA brands
  • Premium brands in NA were a little affected by adverse environment in May (e.g. stock market decline) but not in Europe. On-board revenue yields higher - with NA brands doing better than European brands in the midst of European concerns.
  • North America new deal standards (Emissions Control Area) in middle of 2012--potential impact on fuel costs:
    • fuel costs impact will be $50-70MM dollars (worst-case scenario). (unchanged from previous guidance)
  • Discontinuing air transportation bookings:
    • Carnival cruise lines discontinued only one part of the air service--but very small impact. (other brands did not change air transportation bookings)
  • Booking curve for European and NA customers (length, inventory):
    • About same levels as last year.
    • For 3Q 2010, historically, 85-95% booked; 4Q 2010: historically, 55-75% booked; 1Q 2011: historically, 30-50% booked--still in those historical ranges.


Yesterday, of the 57 global markets we track, the USA was the worst performing.  On a 40% decline in volume the S&P 500 finished lower by 0.4% ahead of very busy week of MARO data points, despite surging overseas market.  There were only two sectors up on the day and the Hedgeye Risk management models have all nine sectors positive on TRADE; the Utilities sector (XLU) is the only sector positive on TREND. 


News flow was essentially limited to the news that China would move towards a more flexible approach to the Yuan’s exchange rate; the Yuan’s yawn faded as the day wore on.  Few specifics were offered, other than that a large one time revaluation was ruled out. This news seemed to be offered as a reason for anything and everything that took place in the markets on Monday - retailers were down because of the possibility of increased expense due to a stronger Yuan; miners and other commodity related companies were up on the possibility of increased Chinese purchasing power; treasuries were off on a possible reduction in Chinese demand.


Treasuries were weak after China's announcement, but recovered much of their early losses throughout the day.  The DXY rose by 0.27% yesterday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (84.92) and Sell Trade (86.65).  The VIX moved higher by 3.9% yesterday but is still down 38% over the past month.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.47) and Sell Trade (31.91).


The euro’s rally stalled yesterday, the currency finishing down 0.34% on the day.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.25).


The three best performing sectors were Materials (XLB +0.6%), Industrials (XLI +0.2%) and Financials (XLF -0.1%). The bottom three were Utilities (XLI -0.7%), Technology (XLK -0.7%) and Consumer Discretionary (XLY -0.8%).


The XLI and XLB were the only two sectors up on the day, although well off the highs of the day.  Copper traded higher by 2% on the day on the news from China and improved Chinese demand would help RECOVERY/REFLATION story.  Notable outperformers were AA +5.5%, DE +2.0%, CAT +0.3% and ITW +1.9%. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.81) and Sell Trade (3.05).


Crude is trading lower for the first time in three days, on renewed concern that Europe’s sovereign-debt crisis will slow the RECOVERY trade.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($73.82) and Sell Trade ($79.57).


Yesterday, Gold did not benefit from the Chinese announcement, with the S&P Global Gold Index down 3% and the XAU (down 2.2%) was weaker as gold and silver moved lower, with notable underperformers being AEM (3.5%), SSRI (4.2%) and PAAS (3.9%).  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,220) and Sell Trade (1,255).    


For the past four days, the Consumer Discretionary sector (XLY) has been the worst performing sector.  The XLY is now down 0.4% over the past week, with the S&P 500 up 2.2% over the same time period.  Yesterday, the S&P 500 Retail Index declined 1.9% and the S&P 600 restaurant index declined 2.2%.  The retail concerns were centered on the impact of a stronger Yuan on their top-line growth and margins.


As we look at today’s set up for the S&P 500, the range is 44 points or 1.6% (1,095) downside and 2.3% (1,139) upside.  Equity futures are trading above fair value following Monday's decline.  Today will see more important MACRO data points, including Existing Home Sales due at 10:00 AM.


Howard Penney













Big Creditor

“China is a big country, inhabited by many Chinese.”

-Charles de Gaulle


I love that quote. Maybe Chuck Schumer should read it and respect who is wearing the pants in this Global Debtor/Creditor relationship. He and his protectionist politician friends of the modern day Roman Empire should stop biting the hand that underwrites their lavish lifestyles and open their eyes to reality.


Our job as your Global Risk Manager is to make sure you don’t miss the big stuff. China is “a big country” that is turning into one really Big Creditor. While yesterday’s pre-open futures fireworks were fascinating to watch, closing prices are what matter in this interconnected world of risk management and, as we pointed out at this hour yesterday, China’s decision to let its currency appreciate is not good for the world’s largest debtor nation.


In terms of total reported and unfunded liabilities, the USA is pushing its debt toward a $57 TRILLION hole ($13.1T in debt that trades + $44T in unfunded liabilities like pension, social security, etc.). In lieu of this mathematical reality and an updated US deficit estimate of $1.6 TRILLION for 2010 (+14% y/y vs. 09’), President Obama’s budget director, Peter Orszag, has decided to leave the Cabinet.


Watch what the people in Washington Officialdom do folks, not what they say…  


Orszag’s decision certainly makes sense to us. He’s only 41 years old and apparently wants to attempt to maintain whatever remains of his actuarial credibility. Both the powers that be at Harvard and in China seem to agree with us on this reputational point:

  1. “There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it.” –Alberto Alesina, Harvard University Professor
  2. “The Fed’s decision to buy” another $300B in Treasuries was called “irresponsible” because it “could weaken the dollar” – Li Xiangyang from the government backed Chinese Academy of Social Sciences

With all of Europe and Japan attempting to implement some form of austerity, the writing is on the wall now for the professional politicians of America. Either tell it like it is and do what newly elected David Cameron is going to do in the UK this morning or get out of the way (Orszag opted for the latter option).


No matter what we have the spine to do politically here in America, the Chinese have officially told us that they are going to march down their own path. Raising the value of its currency and “focusing on domestic demand” means exactly what that country “inhabited by many Chinese” said. They have focused on being the world’s growth engine of exports for plenty long enough. Now it’s time for them to hunker down, build their military, and focus on what they can control.


Sound familiar?


Of course it does - for any student of history at least. If you want to make a global macro call on where this Geopolitical Game of Risk is headed, don’t ask someone in Club Myopia for their “read.” Watch the data.


While the Manic Media was getting hyper about the futures being bid up 24 hours ago, this is what was happening in China:

  1. Food - China, the world’s 2nd largest corn consumer, was forecast to become a net importer of the grain for the first time in 14 years (USDA data)
  2. Discretionary Consumption - Companies focused on the Chinese market, including Beijing-based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said they would gain from lower import costs and stronger consumer purchasing power.
  3. Incomes - More than 20 provinces and cities have overseen increases in minimum wages in recent months to help support incomes

This is what a country called America used to be able to do when it had a strong currency/strong balance sheet policy. This not only provided us the generational opportunity to becomes the world’s largest buyer, but also its largest creditor nation. With that status in hand, we saw wages, incomes, and consumption levels make this country the greatest place on the planet.


Sound familiar?


China is starting to get what Reagan and Volcker taught them – respect the cost and value of your sovereign currency and many great powers will be born out of holding Global Creditor status.


These are early days in Chinese policy shifting, but the Chinese have been here before. In different centuries than this, China has made up almost a third of global GDP (peaking at 32% of global GDP in 1839 when the War with Britain began; “The World Economy: Historical Statistics” by Angus Maddison). By the time Deng Xiaoping began to implement reform in the late 1970’s the Chinese had to dig themselves out of the deep dark hole of less than 6% of global GDP. 


In macro, markets, and in life, to understand where you are going, you better have a real good handle on where you came from. Don’t think for one second that the Chinese don’t see the forest through the trees here folks. They’ve seen the dark hole that politicians can lead a country into. “China is a big country” with a longer history than ours.


My immediate term support and resistance levels for the SP500 are now 1095 and 1139, respectively. In the Hedgeye Portfolio we sold our position in Gold (GLD) at $123.04 and we’ll be looking to buy that back on the pullback. Immediate term TRADE support for the price of Gold is now $1220/oz.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Big Creditor - DENG

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We shorted Ruby Tuesday on Friday for two main reasons.


Firstly, casual dining trends are not showing much strength.  This has been implied by various management companies as well as the whisper number for June’s Knapp same-store sales number which we wrote about last week (CASUAL DINING - KNAPP RUMOR MILL).  News emerging of CPKI slashing Q2 guidance further confirms the softness in casual dining restaurant sales recently, particularly in May when CPKI posted a -7.9% same-store sales number according to their press release.  Specific to RT, we can see in the chart below that compares get increasingly difficult going forward.  The company will need to drive incremental sales year-over-year to maintain or improve trends.




Secondly, driving incremental sales without compromising margins is going to be difficult.  In their third fiscal quarter of 2009 (roughly 1QCY09), according to Chairman and CEO Sandy Beall, “[our] performance started to stabilize in the third quarter as a result of improved sales from our marketing initiatives that better communicated our compelling value proposition to our guests, as well as the implementation of $45 million to $50 million in annualized cost savings.”  As RT laps these marketing initiatives, it will become increasingly difficult to drive traffic without further discounting.  Additionally, while casual dining trends are showing weakness, Knapp Track sales have easier compares over the next few quarters while RT’s compares are growing more difficult.  This should compress their “Gap-to-Knapp” (shown below).






Howard Penney

Managing Director

A slow Europe could still lead to a slow China

Charting Inflation/Deflation

At the beginning of Q2 we introduced a Macro Theme titled “Inflation’s V-Bottom.” In the two charts below (US CPI and PPI) the V-Bottoms in year-over-year prices are outlined in red. For the month of May however we saw both the headline CPI and PPI rollover, sequentially (month-over-month), and we denote that with the little green arrows in the chart below as well.


While we don’t agree with the conflicted and compromised nature of these government calculations, we do agree that it’s important to consider these calculations relative to themselves (that is, until the government changes the calculation again!). For now, what we have learned from these compromised calculations is that there never was a “Great Depression” in consumer prices (the lowest reading was only -2.1% in July of 2009) and, at the same time, there never was a reported “Great Inflation” either (the cycle-high for inflation was just inside of +3%).


Whether the US reports it or not, over the long term, global inflation will remain a reality born out an interconnected world of Fiat Fools manipulating fiat currencies. Reinhart & Rogoff have shown this empirically in “This Time Is Different” (chart on page 181) through the breakout in the median-inflation-rate for all countries using a 5-year-moving-average for the period of 1500 (yes fifteen hundred) to 2006. The big breakout in secular global inflation really started when the US was endowed with the inalienable right to create moneys from the heavens (circa 1971).


Within the long term story of secular global inflation (which China implicitly signed off on this morning through a Yuan revaluation and Brazil did last week by giving 32 million government workers +18% wage hikes), I think the USA just proved that you’ll see headline CPI bounce, cyclically, between -3/+3 percent on its conflicted CPI calculation and producer prices (PPI) move in a range 2-3x that. All the while if he didn’t see it with $150/barrel oil, Bernanke will never see inflation. He’s a modern day Arthur Burns in that regard. It’s sad.


So what do you do with this? Other than never take the government’s word for it, I’m not entirely sure yet…


That said, on an immediate term basis (notwithstanding what’s going on with prices of things that trade in US Dollars around the rest of the world today), the sequential rollover in US headline CPI and PPI should insulate the messaging of the Fiat Fools coming out of this week’s FOMC meetings.


Bernanke’s decision to remain numb to all data that would respect a higher cost of capital than ZERO percent will likely remain Japanese in its monetary policy nature.



Keith R. McCullough
Chief Executive Officer


Charting Inflation/Deflation - US CPI


Charting Inflation/Deflation - US PPI

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