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Carnival: Cruising into trouble

Carnival: Cruising into trouble


Global equities resumed their New Year rally this week, as further evidence of improving economic conditions in the US and China, supported the demand for growth assets. 

The US economy rounded out a third year of job gains after recording another month of employment growth in December. Payrolls rose by more than estimated 155,000 workers last month after a revised 161,000 advance in November, suggesting businesses were not deterred by the political tensions surrounding the fiscal cliff.

Stronger than expected Chinese trade data boosted the positive sentiment among investors, with the country’s exports growing 14.1% in December from a year ago, hitting a seven month peak and comfortably beating expectations of a 4% rise. Imports also increased 6% over the year, double the forecast, leaving a trade surplus of $31.6 billion. The data offers further signs of a cyclical recovery after seven straight quarters of sliding growth, although the outlook remains cloudy with US and European demand for Chinese goods still subdued. 

The improvement in financial markets combined with more encouraging economic data is having a positive effect on consumer sentiment. The European commission’s headline sentiment indicator for the region improved for a second consecutive month in December, although with more fiscal austerity in the pipeline, the debt crisis unresolved and unemployment still rising, headwinds clearly remain. 

Other Eurozone data this week revealed German exports, the world’s second biggest exporter after China, fell sharply in November, while unemployment in the region reached a record high of 11.8%. 

US corporate earnings will be the major focus over coming weeks with Alcoa, the aluminium producer, setting a mildly positive tone and providing an excuse to reignite the optimistic mood among investors. Major bank earnings start with Wells Fargo on Friday, with a plethora of earnings due next week. 

Meanwhile, the Vix volatility index, often referred to as Wall Street’s fear gauge, fell nearly 40% in just four sessions, touching its lowest level since before the financial crisis in 2008. Such a low level, however, might suggest investors have become too complacent and has often been a precursor to a market retracement.

Technical analysis illustrates the recent strength with a break above the psychologically significant 6000 level triggering a rapid move higher to major historical resistance at 6100. A move beyond 6100 would target the pre-financial crisis highs of 6400 and 6750, but with the oscillators at extremely overbought levels, a move higher looks unlikely at this stage. Currently at 72, the RSI has only been above 70 on four occasions in the past five years, with each resulting in a fairly sizeable retracement. 

In conclusion, it has been a great start to the year for equities as investors attempt to price in what appears to be a year haunted by fewer headwinds than recent years. On several metrics, however, global risk appetite looks extended. The Vix is on five year lows, while net corporate and insider buying is falling and technical indicators are on multi-year highs, all precursors to a correction. Investors became far too positive in the spring of 2010, 2011 and 2012, heralding hefty falls in equities, so my mind-set is one of caution with support seen at 6000 5955, 5930 and 5795. 

Increased demand for risk-assets helped industrial commodity prices edge higher, with Brent crude oil nearing $113 a barrel, its greatest for two months. A related company I have been monitoring is Carnival (LON:CCL), the largest cruise ship operator in the world, which will feel the squeeze of rising oil prices on margins. 

Carnival shares sank after announcing fourth quarter results on 20th December 2012, following dwindling bookings since the Costa Concordia “tragedy” in January 2012. Revenue fell 4.1% to $11.7 billion and pre-tax profits declined 9.3% to $1.3 billion. 

The outlook for 2013 was the real disappointment after delivering earnings per share guidance for next year of $2.2 to $2.4, well below previous expectations of $2.49. Chairman, Micky Arison, described conditions as “the most challenging in the company’s history”. The company’s caution reflects weakening demand from Germany, the UK and Southern Europe, while higher oil prices will put further pressure on costs, which are forecast to grow by 1% to 2% this year. 

The shares trade on 17.1x earnings, a significant premium to US listed Royal Caribbean Cruises, their major competitor, which trades on 13.5x earnings, while only yielding a stagnant 2.5%.


As can be seen from the above chart of Carnival, the shares have moved lower over the past six weeks, with both the 50 and 200 day moving averages rolling over, indicating a change in trend following a year of growth in 2012. 

In light of the earlier analysis of the FTSE 100, combined with the vulnerable fundamental valuation and outlook for Carnival, I believe the shares are too high and offer an attractive shorting opportunity in the near-term. 

At the time of writing the share price is 2418p and short-term targets seen at 2321p, 2249p and 2112p, with a stop-loss above the downward trend line at 2491p.


This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Carnival, but client accounts may. The material in this report has come from Simply Charts and Carnival’s corporate website.

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