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TALES OF THE TAPE: MCD, YUM, PFCB, SBUX, CHUX, CBRL, DRI

More weakness in restaurant stocks yesterday with coffee concepts being the worst performers over the last week.

 

Some news items from the restaurant space:

  • MCD Japan revised up its earnings outlook for the year ending December 31st due to the introduction of a new menu and the shutdown of non-profitable stores.
  • PF Chang’s China Bistro has appointed Lane Cardwell, most recently CEO of Boston Market, to the board of directors
  • Goldman Sachs has resumed coverage of YUM with a Neutral rating and $58 price target
  • The Kraft versus Starbucks showdown continues with Kraft raising prices on both its Maxwell House and Yuban Coffee brands by approximately 12% after prices for green coffee rose to 13-year highs.  Starbucks says that the move is in violation of Kraft’s agreement with Starbucks (that Starbucks is trying to sever)
  • O’Charley’s CEO Lawrence Hyatt has resigned, effective this year end.  As you can see in the table below, shares of CHUX sold off on high volume.  Who knew what and when?
  • CBRL subsequently named Hyatt as CFO
  • As the second table below illustrates, the Street’s estimate of DRI’s earnings have been creeping ahead of the quarter – the company reports EPS on 12/20.  Intra-quarter, DRI introduced new products and lowered select prices at Red Lobster.  Business at Reb Lobster continues to lag Olive Garden and Longhorn Steakhouse
  • Burger King is no longer requiring its restaurants to stay open until 2 a.m. on Fridays and Saturdays.  While this is a victory for franchisees, it is a clear indication of the lack of profitability in late night for Burger King

TALES OF THE TAPE: MCD, YUM, PFCB, SBUX, CHUX, CBRL, DRI - stocks 1216

 

TALES OF THE TAPE: MCD, YUM, PFCB, SBUX, CHUX, CBRL, DRI - cd estimates

 

Howard Penney

Managing Director


JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT

Initial Claims Fall 1k Before Revision

The headline initial claims number fell 1k (3k after the revision) this week to 420k.  Rolling claims fell to 422.75k, 5.25k lower than the previous week and a new YTD low.  We continue to remind investors that the unemployment rate won't improve until we see claims move into the 375-400k range - this is based on our analysis of past cycles. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.8%, it's 11.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.8% actual rate as opposed to the 9.8% reported rate. Today's data is a tiny step in the right direction. 

 

 JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - rolling

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - raw

 

Yield Curve Continues to Widen Rapidly

We chart the 2-10 spread as a proxy for NIM. The 2-10 spread has recently expanded sharply, expanding 44 bps in the last two weeks alone and 78 bps since the beginning of the quarter.  Yesterday’s closing value of 287 bps is up from 262 bps last week.

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - spreads

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - spreads QoQ


Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

JOBLESS CLAIMS FLAT BUT YIELD SPREADS BLOWING OUT - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur



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 80.64%
  • SHORT SIGNALS 78.57%

MACAU DEMAND >SUPPLY

PWC raised some eyebrows with their growth projections.  At least for next year, they may be low, and it’s hardly supply driven.

 

 

The main goal in our trip to Macau last week was to gauge the long-term growth potential of the Macau market.  We already get weekly data and with our contacts, we think we have a good read on the near-term developments.  We came away not only positive about current fundamentals but that the market may grow faster than currently anticipated.  Our trip coincided with the PWC release of its Macau forecast which certainly raised a few eyebrows.  PWC thinks the Macau market will grow at a CAGR of 24.7% over the next five years from the 2009 base.  Of course, that includes roughly 50% growth for 2010 which is pretty much in the bag.  Still, their 2011 estimate of 26% growth is pretty compelling.  We think it will be closer to 30%.

 

Are we being too aggressive?  We don’t think so.  Even if the market doesn’t grow from the Q4 run rate (adjusted for seasonality), 2011 will still be over 13% higher than 2010.  Our 30% projection assumes 2% monthly sequential growth, adjusted for seasonality, throughout 2011. 

 

What about same store growth?  Well, Galaxy Cotai will open in the spring and boost table supply by 12%, a substantial increase but well below demand growth.  As can be seen in the following chart, our monthly revenue growth projection remains higher than supply growth in every month of 2011.  To be conservative, we are not assuming any increase in visitation as a result of the opening of Galaxy which is probably unrealistic.

 

MACAU DEMAND >SUPPLY - macau234

 

We remain most bullish on Wynn Macau due to recent market share gains, a clean operation, and a differentiated product.  MGM also looks like a winner as its recent market share gains are sustainable and likely higher margin than the Street expects.  MPEL’s City of Dreams (CoD) is probably most at risk when Galaxy Cotai opens.


The Enemy of Growth

“Conformity is the jailer of freedom and the enemy of growth.”

-John F. Kennedy


I’ve heard a lot about “growth” in recent weeks. After a March 2009 trough to December 2010 peak rally in the SP500 of +83%, the US centric stock market bulls say “growth is back.” As a result, conforming to an institutionalized consensus weeks before our profession receives its year-end bonus check is a mounting pressure in my inbox. I’ve seen this movie before.

 

The Enemy of Growth isn’t going away. It’s called debt. Sovereign debt. And, no matter where you go in the new year, there will be more and more of it…

 

You don’t have to take my word for it on this. The longest of long-term data series we can find on sovereign debt default cycles and their correlations to fiat currency issued debts and structural inflation can be found in Reinhart & Rogoff’s “This Time Is Different.”

 

No, this is not a new thesis this morning. It’s a critical reminder. Because US stock market consensus is choosing to ignore it for a few more weeks doesn’t mean it ceases to exist.

 

The Enemy of Growth isn’t a Thunder Bay bear. It’s marked-to-market on your globally interconnected macro screens every day. While it’s convenient to assume that a +10% YTD return in the SP500 is a leading indicator for growth, one can easily argue that US style Jobless Stagflation won’t lead America to sustainable economic growth in 2011.

 

Remember, “inflation is a policy.” Or at least that’s what an ole school Austrian economist by the name of Ludwig von Mises said. Before your big Keynesian cheerleader of a global liquidity trap leads you to believe otherwise, don’t forget that it was von Mises who already called out Bernanke’s strategy to inflate 50 years ago when he said:

 

“The fact is that, in the not very long run, inflation doesn’t cure unemployment.” (Economic Policy, 4th Lecture, “Inflation”, page 53).

 

The Enemy of Growth is inflation. We know that, much like Jimmy Carter and then Fed Head, Arthur Burns, once tried to argue in the 1970s, some people think inflation is cool for some people. Some of those people aren’t the poor or middle-class however.

 

Currently, there is no more obvious threat to Global Growth Slowing than what you are seeing in emerging markets. Heck, some of these markets (like Hong Kong) might not even be considered “emerging” anymore. That’s not the point – what’s happening on the global macro scoreboard to emerging market stocks and bonds in the last 6 weeks is…

 

Since the beginning of November, here’s the score:

  1. Hong Kong’s Hang Seng Index has dropped -8.1% since November the 8th.
  2. India’s BSE Sensex Index has dropped -8.3% since November the 5th.
  3. Brazil’s Bovespa Index has dropped -7.1% since November the 4th.

Now, the first thing you’ll hear coming out of US-centric stock market bulls right now has nothing to do with:

  1. Spiking Sovereign Debt Yields in Spain, Italy, Portugal, Argentina, America, etc…
  2. US Treasury and Global Commodity markets flashing clean cut inflation signals.
  3. The BRIC’s (Brazil, Russia, India, and China) falling, well, like bricks.

No, no, no. It’s all about a short-term year-end bonus “pop” in US growth associated with cutting taxes so that the world worries more and more about America’s long-term sovereign debt risk. Short term political resolve perpetuating long term systemic risk. Nice trade.

 

Markets “pop” then “drop”… most emerging stock and bond markets are already dropping…

 

Like the broken European promises of reducing their deficit/GDP ratios when European bond yields started breaking out in December of last year (when Hedgeye introduced our “Sovereign Debt Dichotomy” Macro Theme), now professional US politicians are promising you this time is different. This time it’s all about “growth”…

 

This time, The Enemy of Growth is a government inflation policy itself.

 

My immediate term support and resistance levels for the SP500 are now 1232 and 1246, respectively. I continue to be a seller of bonds, reducing my asset allocation to bonds from 6% to 3% as of yesterday’s close. Inflation is bad for bonds.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Enemy of Growth - 1


THE M3: TAM COMMENTS

The Macau Metro Monitor, December 16th, 2010

 

 

TAM: SANDS' REQUEST FOR PLOTS 7,8 CAME LATE Macau Daily Times

Secretary Tam said Sands' application for sites 7 & 8 was submitted after the Macau Government announced in 2008 that it would not accept any new land requests for the development of gaming projects.  Tam also revealed that since Wynn Macau, MGM Macau, and SJM submitted their Cotai applications before that policy was stated, it’s likely their requests will be approved.

 

When asked about the approval of 2,000 imported workers for Galaxy Macau, he explained that it was needed to make sure the property has sufficient workers for the property opening early next year.  He added that Galaxy must hire at least 4,000 locals in order to receive the 2,000 foreign laborers quota.  Galaxy has said that it needs 8,000 workers to open its new resort. 

 

As for why Sands' plots 5 & 6 have not received the green light to hire foreign construction workers, Tam responded, "The Government has to ensure the growth of the gaming industry is happening in an orderly fashion."

 


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