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Eye On Social Unrest ...

South African CPI data released last week hit a record +13%, spurred on by rising energy and food costs. Bracketed by annual household expenditure, the numbers are even more grim. The more than 22 million people (50% of the population) living below the poverty line faced year-over-year inflation of well over 15% last month.

2008 has been difficult for South African industry as the hopelessly overstretched power grid has subjected factories and mines to blackouts repeatedly, causing foreign investors to cool on new projects. For a nation with an unemployment rate in excess of 20%, this is very, very bad news.

As the South African Rand depreciates versus the US Dollar, and domestic cost of living climbs for the residents of Sub Saharan Africa’s largest economy, so too does the risk of more ugly civil unrest like the riots this spring.

Its global this time, indeed.

Andrew Barber
Director

TSN and PPC: Stay Short The Chickens

We recently spoke with the "Chicken Man", David Harvey, who oversees the poultry data at the National Agricultural Statistics Service, who said that the total number of chickens currently slaughtered on average in the United States equals approximately one million birds an hour. "That’s one million every hour, day and night, every day of the year”...

Andrew Barber has charted US chicken production as a percentage of the total estimated US population since the US Depression as well as the per capita estimates that Dave and his team prepared (see charts below).

Tops are processes, not points. This top in per cap chicken consumption is a pending tsunami for TSN and PPC, who we continue to be negative on. While I covered our TSN short position on a big down move on Thursday, look for me to re-short it on strength. For PPC, which I re-shorted on strength on Friday, I'm looking for $10.01 next (26% lower from Friday’s close). There are some big concentrated holders on the PPC shareholder list that may not see the fundamentals here that we do. That’s what makes a market, so we’re looking forward to the debate. Concentration on a holders list like this is a massive liability when company fundamentals begin to structurally unwind. If you own Pilgrim’s Pride (PPC) today, you must think it’s cheap and washed out. We think you think it’s cheap because you are using the wrong numbers.

See charts, courtesy of Stockcharts.com, below. Our restaurant/food/beverage Partner, Howard Penney, remains negative on the chicken processors. See his Research Edge Portal for more.
KM

THE QUESTION

Similar to most consumer industries, these are indeed trying times for the casino sector. To get a better handle on their response to what I believe is the most important long term issue facing the industry, I emailed executives at all the major US casino companies. My question appears in the picture below right. One answer was completely worthy of publishing, which I have done, without edit, below. Complements to Bill Clifford, CFO of PENN, for his thoughtful response. Here you go:


  • "We believe the cost of capital has risen largely because the capital markets weren’t strict enough in evaluating the ability of borrowers to repay their loans. Lately, the capital markets and lenders have refocused on appropriate criteria with reluctance to grant cheap capital to over leveraged organizations or those with projects that, upon fuller analysis, don’t provide a very clear ability to generate adequate returns. Declining returns on investment in the gaming sector were caused in my opinion by granting capital based on a combination of very low base interest rates and virtually no credit risk premiums. These factors, when combined with competitive pressure to build the most and the best product, resulted in operators both initiating projects that were too costly to start and then going over budget (given the access to almost unlimited capital).

    It is my expectation that the capital markets will stabilize in the next year for everyone who has leverage below 4 to 5 times EBITDA which means that Sr. Debt will be available at Libor plus 300-400 basis points and sub debt will be available at 8 to 9 percent. Since gaming companies have historically traded at levels where they can be purchased by strategic buyers or private equity then it is possible that current gaming stock valuations have room to drop further. This is based on the concept that from a strategic perspective the transaction has to be free cash flow positive and the private equity expected returns on its equity has to be 20% (since they can get those levels on highly leveraged gaming credits today). All of the above is predicated on stabilized EBITDA and in the current environment, with most organizations experiencing declining profits, it is even more difficult to justify the valuations of most gaming companies today.

    Unlike many or most of our peers, Penn has the benefit of having a tremendous amount of flexibility with significant capital available to us and we need to be patient on two levels. Equity market investors will take time to adjust to the new debt markets era and the fact that many gaming companies are going to experience higher cost of debt as their current low interest rate borrowings come closer to maturing. At Penn, we are focused on ensuring that regardless of what we purchase that the company maintains a strong balance sheet and those acquisitions or new projects will make sense consistent with our views on future stabilized borrowing costs. In my opinion it will take time but there are going to be some incredibly discounted gaming assets available over the next 12 to 24 months. As we’ve said before, we stand ready to be very opportunistic in this environment which we believe will enable us to do very well for our shareholders."

    Bill



Hopefully, gaming executives are "thinking" about The Question

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DIN – DESPERATE TIMES AT THE APPLEBEE’S CHAIN

On a rainy Saturday in the North East, I was watching ESPN with my son Lawson. Within 10 minutes I saw two Applebee’s commercials for $9.99 ALL YOU CAN EAT chicken fingers, BBQ riblets or crispy shrimp...

I turned to Lawson and asked him if he was hungry? He said "not for Applebee’s!!!"

OUCH!
From the Applebee's web site!

Asian Inflation: It's Global This Time, Indeed...

Analysts are catching onto the fact that an inflating US Dollar does not make everyone a winner out there in the land of global commerce. One of the biggest losers, is the Asian consumer.

Asian currencies have been getting hammered, and we have been beating on the associated economic fallouts of that reality for the last 6 weeks in our sector portals. Many CFO's imply to us that were not prepared for this. Neither are sovereign governments who are dealing with heightened social unrest associated with importing currency inflation.

Below we have put together 5 year charts of all the major Asian countries we follow. Commodity oriented inflation may be dampening in this country, but we're going to export currency inflation to the world. This is a "Trend" that will continue to result in higher cost of capital, globally.

KM

US Bank Failure Chart, Updated for #11 this week, Silver State Bank

One potentially important statistic to keep in mind: So far this year, the US banks that have failed held more than $1.12 Billion in deposits spread across 12,600 accounts which exceeded FDIC insurance limits. That means that almost 13,000 affluent account holders have received news that a portion of their deposits might be gone due to the failure of the bank they use.

Most of those people will ultimately be made whole by the banks which take receivership, but consider the implications for consumer confidence when 13,000 wealthy households (many that have already witnessed plunging a real estate market, weakening dollar and frozen auction rate funds) experienced the shock of learning that some of their savings may have simply evaporated overnight.

Andrew Barber
Director

Daily Trading Ranges

20 Proprietary Risk Ranges

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