Conclusion:  A number of factors that influence restaurant sales trends and despite a numbers of cautious signs that should normally impact sales trends, a number of concepts continue to show improving trends. 


Sysco Corporation executives shared some important insight on their conference call today:

“So I think we are beginning to see some things that would hopefully lead to more positive growth for the industry.  With that said, I think what we're also continuing to see is the strongest operators are doing the best.  So it's definitely better than what it was a year ago, and it's certainly better than what it was six months ago.  I'd say it's still somewhat tenuous, but if you're a good operator out there today, you're starting to see some good signs of late despite.”


We also need to consider the following:

  1. The October employment numbers suggest the economy regained momentum early in the fourth quarter and sentiment certainly reflects that.  However, there were seasonal adjustments that were incorporated into the payrolls number that exaggerated the true level of job growth.
  2. Another factor limiting the upside of my perspective for restaurant stocks is the fact that both personal income and spending weakened in September.  Personal income fell 0.1%: the first decline since last September.
  3. The most recent consumer credit data also suggests that some caution may be warranted.  Restaurants have shown resilience in sales trends of late but a deleveraging consumer is a concern going forward.  The continuation of low price points despite the relatively strong sales performance of late indicates that management teams appreciate that the consumer is still under pressure.


Margins in the restaurant industry remain relatively robust and this is surprising to me given the high levels in food prices and the CRB foodstuffs index.   Another insightful comment from SYY today was that they are seeing 10% inflation in meat, dairy, and seafood.


RESTAURANTS TRENDS - knapp vs con credit


Howard Penney

Managing Director


Conclusion: I continue to like COSI from a long-term perspective.  Management continues to follow through on focused revenue-driving strategies such as the “Freestyle” beverage dispensers and continued development of online systems.


Cosi Restaurants and Coca-Cola recently hosted a blog event in Chicago where Cosi was introducing their fall sandwiches and Coca-Cola was demonstrating their Freestyle beverage machine.


Coke has selected COSI to launch the Freestyle equipment in the Midwest (currently COSI has it in three locations.) The Freestyle dispensers each contain 30 cartridges of flavorings that mix up 100 different drink combinations.  The new system will give COSI more accurate inventories of the beverages they serve.   The stores will be able to view graphical drink consumption reports that rank drinks sold during specific day-parts on an e-business portal Coke has set up.  Traditionally, most fast-food restaurants collect data using point-of-sale systems that only capture beverage cup size and the number of cups sold each day.


For the short-term, at least, the new Coke freestyle machines will give the concept an unique advantage over the competitors in the Midwest. 


COSI is due to report earnings on November 11th after the market close.  The company also reported that that system-wide same-store sales for 3Q10 increased 5.2%; company-owned stores rose 6.6% and franchise-operated stores rose 2.9%.  Late in the third quarter, the company started rolling out online ordering for the company store base with which will likely accelerate growth in same store sales during 4Q.  For the quarter, we expect the company breakeven on an EPS basis and possibly even register a modest profit.  The stock is currently trading at $1.29, registering a 9% gain over the past week.




Howard Penney

Managing Director

Eye on Obama: Reviewing President Obama’s Comments on 60 Minutes

Conclusion: President Obama’s post mortem on the midterm elections on 60 minutes on Sunday night provided some insight into policies that we could see evolve over the next couple of months as it relates to taxation, stimulus, and housing.


In the note below, we’ve highlighted some key takeaways from President Obama’s recent interview on 60 minutes with Steve Kroft.  Below are the actual quotes, and we’ve provided our interpretation of the President’s statements.  We would expect more insight in our discussion with Peter Orszag tomorrow, but it does seem that the President intends to shift more towards the middle on a fiscal basis.



PRESIDENT OBAMA: There are some sincere Republicans in the Senate like Tom Coburn, Oklahoma, who is about as conservative as they come, but a real friend of mine and somebody who has always had the courage of his convictions and not, you know, bringing pork projects back to Oklahoma. 


Hedgeye Interpretation:  President Obama seems to have learned the lessons of the midterms and will make a concerted effort to reach out to the Republicans.


PRESIDENT OBAMA:  You know I think what I would have done is to be more scrupulous about sticking to some of the commitments I had made in how to get it done. For example, I made a commitment that I was gonna make sure that the key negotiations around health care were on C-SPAN. And the truth of the matter is that, you know, you have five different committees over there that are working on it.


Hedgeye Interpretation:  President Obama believes one of the failures of his first two years was the promise of transparency, so look for more transparent governing in the coming two years.

PRESIDENT OBAMA:  I had a conversation here in the Oval Office with Warren Buffett, who remains very optimistic about America's long term prospects. And he said, "Look, let's take the housing market, which is about as big of a drag on the economy as anything." He said, "We overbuilt for a lot of years. Now, we're underbuilding to soak up that inventory over the course of several years. More new families are gonna go out there and start buying homes. And slowly housing prices are gonna stabilize. And these foreclosures are gonna end and things are gonna pick up." So, some of it is just a matter of the economy recovering from a real trauma, a real body blow.


Hedgeye Interpretation:  It seems that President Obama may be leaning towards a more market based solution to a recovery in housing, which is that over time supply and demand will come back into balance; rather than further government intervention.


KROFT: Congressman Boehner is the next Speaker of the House, most likely, offered you a compromise back in September. He suggested extending the tax break for the wealthiest for two more years. And rolling back discretionary government spending to levels before the bailout in 2008. Is that something that you could live with?

PRESIDENT OBAMA: I think that when we start getting specific like that, there's a basis for a conversation. I think what that means is that, you know, we can look at what the budget projections are. We can think about what the economy needs right now. Given that it's still weak. And hopefully, we can agree on a set of facts that leads to a compromise. But my number one priority coming into this is making sure that middle class families don't see their tax rates go up January 1st.”


Hedgeye Interpretation:  Taxation policy will likely include some form of an extension of the Bush tax cuts, and will likely be more to the middle than we would have expected even a couple of months ago.   We would expect Obama to give in to Republican wishes and kick the can down the road over the next two years.

PRESIDENT OBAMA: The truth is that the way this thing works out, it's folks who are millionaires and billionaires who get the biggest breaks. And, you know, if you talk to Warren Buffett, he'll tell you, "I'm not gonna buy somethin' because of a tax break, because whatever it is I need, I can already afford." And the same is true for me. And the same is true for you.


Hedgeye Interpretation: While Obama might cave to the Republicans on taxation, it will be a negotiation and he will have the likes of Warren Buffett supporting his case.


PRESIDENT OBAMA: Well, it wasn't because The Recovery Act didn't work; it's because the modeling, in terms of what to expect where unemployment would go to, turned out to be wrong. So, you know, I don't wanna pretend like I've got a crystal ball.


Hedgeye Interpretation:  If you want to know why Christina Romer is back at Stanford, now you know.  Her models were wrong.  This explicit call-out suggests that Obama will hold more of his cabinet accountable to specific goals, especially on the economic front. 


Daryl G. Jones
Managing Director

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Brazilian Consumer Update

Conclusion: All told, we continue to remain favorably disposed to the Brazilian consumer, which is being supported by a significant confluence of tailwinds. We are, however, not currently invested in Brazil at this current juncture, as the outperformance looks to be in the rear view for the immediate term.


Consumer Credit Demand Falls in October, though Still Robust

Credit analyst agency Serasa Experian reports the number of consumers seeking credit fell 3.2% MoM in October, after setting a record in September.  Experian says this decline does not represent a shift in the trajectory of consumer credit, as it is primarily a calendar effect because of the observance of Children’s Day in September, and because October had two fewer business days.  Year-over-year, demand for consumer credit was up 15.2% in October and up 15.7% YTD, versus the year-ago period.


Brazil’s Relatively High Cost of Living

A report in O Globo finds common articles in Brazil can cost as much as six times as much as in other countries.  Examples include PlayStation 3, which costs R$ 2,000 in Brazil, four times the US price of US$300 (R$ 510).


A comparison of automobile prices found the Toyota Corolla XEI costs R$ 75,000 in Brazil, versus the equivalent of R$ 58,740 in South Africa, R$ 33,782 in Japan, and R$ 32,797 in the US.  Consumer advocates say this is largely attributable to high taxes and import duties, as well as to a corporate culture of maintaining exorbitant profit margins.


We think there may be significant market inefficiencies at work, as the O Globo report notes the nation’s consumer market is still evolving and lacks broad reference prices.  Also, there is still a cultural bias that foreign manufactured products are more luxurious than domestic manufacture.  Brazilians have a penchant for buying certain items overseas – even paying the 50% duty to bring in items over the US$ 500 personal limit on dutiable purchases.


Vehicle Production Rises, Sales Fall

Brazilian auto manufacturers produced 321,800 vehicles in October, 5.5% higher than September and up 1.5% over last year.  Sales for October fell 1.3%, to 303,200 units, which is still 3% higher than October 2009. 


All told, we continue to remain favorably disposed to the Brazilian consumer, which is being supported by a significant confluence of tailwinds. Brazil’s unemployment rate fell 50bps MoM to a record low in August, coming in at 6.2%. Average real incomes also increased +1.3% MoM and +6.2% YoY and the latest data (April-July) show Brazilian consumer borrowing rates are at the lowest level since 1995 (6.74% per month).


We are, however, not currently invested in Brazil at this current juncture, as the outperformance looks to be in the rear view for the immediate term. As of the end of last week, the six largest Brazilian retailers had P/E ratios that were over 3x those of the underlying Bovespa Index, suggesting there is some mean reversion to be had to the downside.


Moshe Silver

Managing Director


Brazilian Consumer Update - 1

Bear/Bull Battle: SP500 Levels, Refreshed...



As of 2PM EST the SP500 cash level of 1221 is: 

  1. -21.98% below its 2007 all-time-high
  2. +80.62% above its 2009 cycle-low 

Now what? With the US Dollar Index up on the day and correlation risk running this high, you’d think the stock market would be down more. Think again… and again… and again… because that’s what you should be doing if a topping process is underway. These are the times that you think the market will never go down again.


That’s obviously as silly as thinking that the US stock market would never go up again in March of 2009. I don’t want to be silly. I just want to be right from now until whenever I make my next move. Currently my position is to stay short this market. That’s despite registering another higher-high of resistance up at 1234. That’s despite getting hundreds of emails reminding me not to “fight the Fed.” That’s despite people saying its different this time.


The global macro calendar this week is going to be as hawkish as we’ve seen it in months: 

  1. Wednesday = US Import Prices for October (inflation)
  2. Thursday = G20 meetings begin (US Dollar bullish)
  3. Thursday = Chinese inflation data for October (inflation) 

I know, I know… “they” say what they said in late 2007. The world is “awash with liquidity” and inflation in the US is not a concern - chase yield.


Immediate term TRADE support is -1.8% lower at 1199.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - 1


The first week of November averaged HK$562m per day in table gaming revenues and currently is on track for HK$17.0-17.5bn in total gaming revenues including slots. 



It’s only one week of data and we don’t know the hold percentage but if current revenue levels continue, November would be up 43-47%.  At that rate, we would view November as more impressive than October because:  1) November didn’t contain a Golden Week, 2) November is seasonally slower, and c) the November comparison is much tougher than October.  As a reminder, November gaming revenues were up 60% in 2009.


The market share numbers are shown in the table below.  Obviously, LVS looks very low (usually between 19% and 20%) and Wynn and MPEL are very high.  We assume hold played a big role in those market shares so we’d expect them to moderate.  What is clear is that MPEL’s jump in market share the last 4 months looks sustainable.



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