TODAY’S S&P 500 SET-UP - January 28, 2011


Equity futures are trading mixed to fair value after Thursday's uneventful day.  Overnight, Moody's said on the US 'Aaa' rating: "Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising". Today we have the release of Q4 GDP and the final reading of January Michigan Consumer Sentiment.



  • 8 a.m.: Fed’s Joseph Tracy speaks in Orangeburg, New York
  • 8:30 a.m.: Employment cost index, 4Q, est. 0.5%, prior 0.4%
  • 8:30 a.m.: GDP, 4Q, est. 3.5%, prior 2.6%
  • 8:30 a.m.: Core PCE, 4Q, est. 0.4%, prior 0.5%
  • 9:55 a.m.: Uni. of Michigan confidence, Jan., F, est. 73.3, prior 72.7
  • 1 p.m.: Baker Hughes rig count, Jan. 28  


  • (AMZN) forecast 1Q oper profit $260m-$385m vs est. $474.4m
  • Boston Scientific (BSX) got sued by U.S. for selling certain defective cardiac devices
  • Chubb (CB) forecast 2011 oper. EPS $5.35-$5.75 vs est. $5.82
  • Digital River (DRIV) forecast 2011 non-GAAP EPS $1.13 vs est. $1.35
  • MarkWest Energy Partners (MWE) boosted quarterly div to 65c from 64c; first increase since Oct. 2008
  • Microchip Technology (MCHP) forecast 4Q adj. EPS 56c-57c vs est. 57c, posted 3Q rev. $367.8m vs est. $362.9m
  • Microsoft (MSFT) reported 2Q adj. EPS 77c vs est. 68c, unearned rev. $13.42b vs est. $14.1b, according to data compiled by Bloomberg
  • Monster Worldwide (MWW) forecast 1Q adj. EPS 1c-4c vs est. 4c
  • QLogic (QLGC) reported 3Q adj. EPS 53c vs est. 42c
  • SanDisk (SNDK) forecast 1Q rev. $1.2b-$1.28b vs est. $1.16b
  • Tessera Technologies (TSRA) said it sees 1Q charge $2.5m-$3m, cites job cuts
  • Thoratec (THOR) reported 4Q adj. EPS 28c vs est. 29c
  • VeriSign (VRSN) says on conf. call sees 2011 rev. $750m-$780m vs est. $772.2m
  • Timothy F. Geithner gives address in Davos today; agenda for his trip also includes meetings with ECB President Jean- Claude Trichet, U.K. Chancellor of the Exchequer George Osborne and Belgian Prime Minister Yves Leterme
  • BankUnited raised $783m in IPO yesterday; sold 29m shares at $27 apiece after offering 26.3m shares at $23-$25 each
  • Sara Lee holds conf. call at 10 a.m. to give update on “strategic initiatives.” JBS gave up efforts to raise financing for takeover bid, making a spinoff of SLE coffee unit more likely, person with knowledge of the matter said yesterday
  • Kraft is re-assessing its brand portfolio and may look to sell slower-growth units such as Oscar Mayer meats business, NY Post says, citing unidentified source 
  • 69% of investors in Bloomberg global poll say Facebook is overvalued after Goldman invested $450m in a deal that put co. worth at $50b


  • American Electric Power (AEP) 6:57 a.m., $0.39 
  • Dover (DOV) 7 a.m., $0.82 
  • Ford Motor (F) 7 a.m., $0.48 
  • Honeywell International (HON) 7 a.m., $0.86 
  • Idexx Laboratories (IDXX) 7 a.m., $0.55 
  • Oshkosh (OSK) 7 a.m., $0.91 
  • AirTran Holdings (AAI) 7 a.m., $0.05 
  • Alliance Holdings GP (AHGP) 7 a.m., $0.71 
  • Alliance Resource Partners (ARLP) 7 a.m., $1.60 
  • Amcol International (ACO) 7 a.m., $0.41 
  • Scotts Miracle-Gro Co/The (SMG) 7 a.m., $(0.91)
  • Dominion Resources /VA (D) 7:30 a.m., $0.66 
  • *T Rowe Price Group (TROW) 7:32 a.m., $0.68
  • AGF Management Ltd (AGF/B CN) 8 a.m., $0.34 
  • Arch Coal (ACI) 8 a.m., $0.41 
  • Chevron (CVX) 8:30 a.m., $2.40 
  • Synovus Financial (SNV) Pre-mkt, $(0.20)
  • Enbridge Energy Partners (EEP) 4:01 p.m., $0.70 



Yesterday, the XLP broke the Hedgeye TRADE line as the earnings calendar seemed to be the big headwind for the staples - 8 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.04%, S&P +0.22%, Nasdaq +0.58%, Russell 2000 +0.22%
  • Month/Quarter/Year-to-date: Dow +3.56%, S&P +3.33%, Nasdaq +3.86%, Russell +1.50%
  • Sector Performance - (6 sectors up and 3 down): - Financials +0.88%, Consumer Disc +0.79%, Industrials +0.37%, Tech +0.34%, Utilities +0.38%, Healthcare +0.25%, Energy (0.58%), Materials (0.83%), Consumer Spls (1.01%)  


  • ADVANCE/DECLINE LINE: 338 (-823)  
  • VOLUME: NYSE 990.18 (+8.95%)
  • VIX:  16.15 -2.94% YTD PERFORMANCE: -9.01%
  • SPX PUT/CALL RATIO: 2.66 from 1.06 (+151.57%)



Treasuries were higher with help from another well-received auction

  • TED SPREAD: 17.35 +0.913 (5.555%)
  • 3-MONTH T-BILL YIELD: 0.15% -0.01%     
  • YIELD CURVE: 2.83 from 2.83


  • CRB: 331.39 -0.43%  
  • Oil: 85.64 -1.94% - trading +0.12% in the AM
  • COPPER: 433.85 +1.68% - trading +0.27% in the AM
  • GOLD: 1,322.20 -0.65% - trading -0.47% in the AM


  • Oil’s link to U.S. equities has unraveled from its strongest level in at least 20 years as increasing inventories reduce the price of crude in New York. The 30-day correlation between these two benchmarks was at 0.28 yesterday compared with 0.82 on Nov. 16, the highest level since at least March 1991.
  • Natural gas dropped to a four-week low on speculation that a stockpile decline last week wasn’t enough to keep supplies from reaching a record by November.  Gas fell 3.9 percent after the Energy Department said inventories dropped 174 billion cubic feet to 2.542 trillion.
  • Copper rose the most in two weeks on speculation that low U.S. borrowing costs will buoy demand for industrial metals.
  • Better-than-expected US home sales data turned the sentiment positive in entire base metals at LME, and zinc future traded higher at $2,276 per ton on London Metal Exchange (LME).
  • Argentine rains in recent days were not enough to help corn crops recover from earlier dry weather, the Buenos Aires Cereals Exchange said.  The crop, which is about 99 percent planted, is forecast to reach 19.5 million metric tons, the same as a week earlier, the exchange said today in an e-mailed statement.
  • Bangladesh, South Asia’s biggest rice buyer, doubled its import target for this year to cool domestic prices that surged to a record in December as consumers and farmers hoarded supplies, a government official said.
  • Wheat fluctuated in Chicago as some investors liquidated contracts after prices reached a five-month high on demand from North Africa, where riots broke out this month over rising food costs.  The grain gained 9.1 percent in the past two weeks as rioting in Algeria, Tunisia and Egypt sparked demand for food commodities.
  • Cocoa prices capped the longest rally in more than three years, touching a one-year on increased speculation that supplies will be disrupted from the Ivory Coast, the world’s largest producer. 
  • Cotton futures in New York jumped to a record as growers struggled to meet surging demand from China, the world’s biggest consumer.  Prices have more than doubled in the past year as China’s imports climbed to the highest level since 2006 and adverse weather slashed global crops.
  • The total U.S. cattle herd at the start of this year shrank to the smallest size since the Eisenhower Administration, reflecting high feed costs, aging producers and drought that hurt pasture conditions.  As of Jan. 1, the nation’s inventory of all types of cattle and calves fell to 92.1 million head, down 1.7 percent from the same date in 2010, according to a survey of analysts. That would be the smallest herd for that date since 1958, according to government data. 


  • EURO: 1.3703 +0.15% - trading +0.19% in the AM
  • DOLLAR: 77.727 -0.22% - trading +0.04% in the AM


  • FTSE 100: (0.78%); DAX: +0.11%; CAC 40: (0.05%) (AS OF 5:30 AM EST)
  • European markets trade mixed with peripheral European indices generally outperforming the region.
  • Indices opened lower before paring losses, an exception being the FTSE100 that remained near session lows. Declining sectors lead advancers 12-6 with healthcare (1.8%) and food & beverage (1%) leading fallers.
  • Financials lead gainers, banks +1% and insurers +0.8%, building on yesterday's advance, aided by optimistic comments from Bank of America's CEO in Davos.
  • The Irish Taoiseach says he will dissolve the Dáil on 1-Feb and announce a date for the General Election.
  • Spain's unemployment rate in Q4 rose to 20.3% from prior quarters 19.8%. US futures trade lower
  • UK Jan GfK consumer confidence survey (29) vs consensus (22) and prior (21)
  • The pound was pressured by the weak UK consumer confidence data and comments by Chancellor Osborne that the UK faced particularly acute challenges with the recovery likely to be slower than some other European countries
  • U.K. Jan. consumer confidence plunged most since 1994; fell 8 points from Dec. to minus 29: respondents have become more cautious on housing decisions, are worried about interest rate increases


  • Nikkei -1.13%; Hang Seng (0.68%); Shanghai Composite +0.13%
  • Most Asian markets fell today, with india down the most (1.54%)
  • China finished flat as new real-estate taxes in Chongqing and Shanghai harmed sentiment. Gains in small caps balanced weakness in property and financial shares.
  • South Korea fell (0.34%), but Samsung Electronics  rose 2% on results, and Hynix Semiconductor gained 5% on its outlook.
  • CNOOC dropped 7% to lead energy shares down in Hong Kong, and property counters fell on developments in China.
  • Energy Resources of Australia plunged 13% after canceling its dividend and reporting a 2010 net at the bottom end of guidance.  Australia treaded down (0.65%).
  • Megabanks fell on S&P’s ratings downgrade for Japan.
  • Japan December household spending (3.3%) y/y vs cons (0.6%). December retail sales (2.0%) y/y. December jobless rate 4.9% vs prior 5.1%. December core CPI (0.4%) y/y vs (0.5%) cons.



The Macau Metro Monitor, January 28, 2011


A new draft of the government’s proposal to revise Macau’s smoking law, but allow smoking areas in casinos, has already been submitted to the Legislative Assembly.  Casinos can create smoking areas covering a maximum of half of the casino floor and must be physically separated from the non-smoking areas.  If passed, casinos will have one year after the new law is enacted to set up such smoking areas.


SJM has announced a 5% salary increase for its entire staff, starting February 1.



According to sources, China may order its biggest lenders, including Industrial Commercial Bank of China and China Construction Bank Corp. to raise capital ratios to as high as 14% when credit growth is judged excessive.  In normal conditions, lenders deemed systemically important will need to have a minimum 11.5% ratio, unchanged from the current requirement for China’s biggest banks, said the person.



The Macau Government's final approval for the Hengqin Border crossing between Macau and Zhuhai to open 24/7 is still pending, although approval is expected.




The Last Entitlement

This note was originally published at 8am on January 25, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“When a milestone is conquered, the subtle erosion called entitlement begins its consuming grind.”

-Pat Riley


It’s Game Time. And tonight, America’s currency needs a big win. So, as a little pre-game prep for President Barack Obama’s State of the Union speech, I thought I’d toss him a little love from 5-time NBA Championship Coach, Pat Riley.


On the pre-game wire (US Dollar Index trading $78.16 as of 7AM EST), across durations, world currency markets are betting against America’s credibility and fiscal resolve:

  1. US Dollar Index immediate-term TRADE line resistance remains overhead at $80.05
  2. US Dollar Index intermediate-term TREND line of support ($78.66) is broken
  3. US Dollar Index long-term TAIL line of resistance remains firmly entrenched up at $81.62

Sure, some privileged Americans are willing to turn a blind eye to their sovereign currency, employment, and inflation levels. Some, like The Ber-nank, still fundamentally believe that America’s stock market is the barometer of her long-term health. All the while some “Wall Street Bankers”, according to the #1 headline on Bloomberg this morning, are “partying in Davos.” Ah, the storytelling about the depression and the deflation – nice.


The only problem with all of this is the other HALF of Americans who have $2,000 or less in some form of a stock and bond market account. For them, America’s leadership needs to stand ready to sacrifice tonight or else their team, to borrow another thought from Pat Riley, will continue to regard their “former greatness as a trait and a right.” Then, “half hearted effort becomes habit” … and “the champion is sapped.”


The world’s history of great Empires sides with me on this. From the Roman and British Empires of political entitlements past, I can only hope we’ve learned something. We’ve already crossed the proverbial Rubicon of senatorial deficit and debt spending. Time is no longer on this entitled state’s side.


The Last Entitlement in this country isn’t Social Security or Medicare – it’s cheap capital. And if the US Dollar is abused any further, “subtle erosion” of America’s global economic power will continue its “consuming grind.”


If there’s one picture that shows this most obviously (see the chart below), it’s the series of lower-highs and lower-lows that Presidents Bush and Obama have chosen to oversee with their Big Government Intervention, Spending, and Dollar Devaluation policies.


Yes, inflation is a policy. And no, it doesn’t have to be this way. It wasn’t this way under Reagan; it wasn’t this way under Clinton either. Both of these Presidents had an explicit strong US Dollar policy that led to two of the most productive decades of job growth in US history. Whereas, under Presidents Bush and Obama, America witnessed a decade (2000-2010) of net ZERO American jobs created and now we’re staring down the pike of American style Jobless Stagflation that we haven’t seen since Jimmy Carter blessed the Fed’s Arthur Burns “monetization” of US debt.


The Last Entitlement is perpetuated by a completely politicized US Federal Reserve. It prints the moneys. It prints the asset inflation. It justifies its actions with politicized fear mongering that permeates the American psyche.


It also shortens economic cycles. It amplifies asset price volatility. And, if you haven’t noticed, it doesn’t work.


All of this can be conquered if America holding the world’s reserve currency in the palm of her hand is respected again. We also need to respect the cost of capital or continue to run the risk of handing it out to these Bankers of America who continue to hoard it and destroy it via the Piggy Banker Spread.


Respect, unlike entitlements, is earned. And God help us all if we don’t have it within us to recognize this after the last 3 years.


In case you didn’t get the message from China’s President last week, the rest of the world is starting to bet against America’s currency too:

  1.  President Hu called the US Dollar reserve system “a product of the past”
  2.  President Hu warned that Americans need to keep the USD at “stable levels given implications to global liquidity and capital flows”

What he meant by that, Mr. Ber-nank, is global inflation being priced in US Dollars.


This morning you are seeing Global Inflation Accelerating continue to have its impact on major Emerging Markets:

  1. China was down another -0.68% overnight, taking it to -4.7% already for the YTD
  2. India was down another -0.95% overnight, taking it to -7.5% already for the YTD
  3. Brazil remains flat for the YTD and broken from an intermediate term TREND perspective.

Meanwhile, it’s not just emerging stock and bond markets telling you that US government sponsored Dollar Debauchery perpetuates inflation. India’s central bank Governor Subbarao just said at a ceremony in Mumbai that he is quote-un-quote “desperate” to cool inflation.


All the while, just to highlight the divide between our myopic Keynesian Consensus (that’s somehow patting itself on the back in Washington for “saving” us again) and Free Market Libertarians who are getting ready to move to Canada, consider these 2 American quotes from the last few days:


1.  “A more active government also attracts opportunists, who perceive that a national emergency can serve as a useful pretext for achieving their own objective.” –Steve Hanke (“On Democracy versus Liberty, GlobeAsia, February 2011)


2.  “Oh, and what evidence is there that the economy’s capacity is damaged during booms?” –Paul Krugman


Sadly, the unaccountable Big Government Intervention Bubble Making Machine of the Krugman camp dominates both the President and the Chairman of the US Federal Reserve’s craws. Before you know it, they’ll be asking to regulate food inflation in commodity markets. At least that’s what France’s Nicolas Sarkozy said he wants to do this morning. C’est la regulated socialist market vie!


Dear Mr. President, it’s Game Time, and this Burning Buck stops with you.


My immediate term support and resistance lines for the SP500 are now 1285 and 1295, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Last Entitlement - respect

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Munis: Flurry, Blizzard or Avalanche?

“No snowflake ever falls in the wrong place.”

- Ancient Zen Proverb


Both the title of this morning’s Early Look and the quote above are very apropos for the current weather gripping New Haven, CT and much of the northeastern United States. Though the mounds of snow which line our streets are several feet high, it’s “business as usual” for those of us who refuse to blame our disappointments on things like “the weather”.


Addressing the quotation specifically, the saying above traces its origins to Zen, a school of Mahayana Buddhism. Per our friends at Wikipedia, what distinguishes Zen from other schools of Buddhism is its search for enlightenment through self-realization in Dharma practice and meditation rather than a reliance on text and intellectual reasoning.


In the asset and risk management industry, an overreliance on intellectual reasoning can get us into trouble, as we often lean towards the conviction we receive from our data analysis and channel checks versus what may or may not be blatantly obvious. In fact, we’ve all been trained to fade the obvious – even sometimes to a fault.


This brings up an interesting topic that is gathering momentum in the marketplace: Muni Bonds. The divergence in sentiment between retail investors and institutional investors seems to get wider by the day, as one group (retail) rushes to avoid what is perceived by some to be a pending crisis while the other (institutional) finds current valuations as a definite reason to “fade the obvious”:

  • Yesterday, it was reported that retail investors withdrew an additional $1.9B out of muni bond mutual funds. Though down from last week’s record $4B redemption, the trailing four-week average increased slightly to $2.3B. All told, the last eleven weeks saw a cumulative outflow of $22.5B, according to Lipper FMI. That’s ~22.5% of the roughly $100B poured into the funds from January 2009 – October 2010. Yes, there’s another side to the Bush Tax Cut extension trade…
  • Amidst the selling by retail investors, asset managers have used the latest backup in yields as a buying opportunity to lock in exceptional tax-adjusted rates, sending average yields on G.O. muni bonds down (-16bps) wk/wk, as measured by the Bond Buyer 20 Index. To a lesser extent, revenue bonds were bid up as well, with yields falling (-5bps). This was the first weekly decline in muni bond yields in four weeks.

To state it bluntly, we don’t see current prices for muni bonds as an investable opportunity to “fade the obvious”. We’re neither brave nor smart enough to get in the way of a potential wave of defaults, restructurings and credit downgrades (emphasis on potential, as we disagree with Whitney that $50-$100B worth of defaults is a foregone conclusion).  You don’t need defaults for the price of a bond to go down.


Even for those brave investors who possess the analytical firepower to find value in the muni market at current yields – including the highly-regarded Lyle Fitterer – we think many of them may actually be using faulty data in their analysis. Fitterer, the top muni bond fund manager of the last decade, remarks, “The baby has been thrown out with the bathwater”; as such, he’s using the current back up in yields as a buying opportunity for specific revenue bonds.“If a State were to file bankruptcy, I have a bond with a dedicated revenue stream,” he says.


Fitterer’s comments beg the question, “What’s a revenue bond worth when it doesn’t meet its revenue target?” Probably the same as an equity that misses estimates amid bullish sentiment: less. While we’re not yet calling for a spate of “misses” across the nation, we do think the confluence of slowing domestic growth, rising interest rates and a rapidly deteriorating housing market will weigh heavily on the finances of States, municipalities and municipal authorities alike in 2011:

  1. Consistent with our Consumption Cannonball theme, we expect consumer spending to roll over in 1H11. Sales and income tax receipts combine for ~55-60% of State and local government revenues. Deteriorating fundamentals = bad for muni bonds.
  2. Consistent with our Trashing Treasuries theme, accelerating inflation on the strength of a Debauched US Dollar continues to support rising US Treasury bond yields. The Ber-nank may not see inflation, but the global bond market sure does. A rising interest rate environment = bad for muni bonds.
  3. Consistent with our Housing Headwinds Part II theme, we think US housing prices could end up down (15-20%) by the time the July 2011 Case-Shiller data rolls in (early fall). Property tax receipts make up roughly 26% of local government revenues, though they are typically assessed on a 2-3 year lag. Regardless, municipalities across the nation are running out of headway to finagle with their accounting. US housing wasn’t exactly robust over the last 2-4 years. The oncoming wave of lower property tax receipts = bad for muni bonds.

Speaking of borderline accounting fraud, a very alarming trend has emerged over the course of the most recent economic downturn. Rather than lie about their deteriorating finances, a growing number of municipalities have opted to hide them instead.


A recent study done by DPC DATA Inc. revealed that over 56% of municipal issuers did not file a financial statement in any given year between 2005 and 2009. Over 33% of them skipped filing in three or more of the past five years. In the latest year (2009), the percentage of non-filers jumped +360bps to 40.2%. An additional 30% filed “extraordinarily late” that year, according to the analysis.


It’s tough to analyze what you can’t see. Moody’s Managing Director of Public Finance, Robert Kurtter, agrees, saying on CNBC’s Squawk Box that 2/3rds of all muni issuers are unrated (1/14). And even if they we’re “rated”, we’re not buyers in blind faith of America’s ratings agencies!


Regardless of your perception of the fundamentals, the “snow” is falling in the muni bond market and the thick coat of snow accumulating serves as a metaphor for the opacity that’s associated with issuer finances. When the ice melts in the coming months, will you be holding a bag full of “unforeseen” risk because you bought the first dip after a 30-year bull market in muni bonds? We definitely won’t be – that’s for sure.


Remember, no snowflake ever falls in the wrong place.


Darius Dale



Munis: Flurry, Blizzard or Avalanche? - red

Chart OF THE DAY: If You're Going to Dance with the Devil, Make Sure You Pick the Music

If You're Going to Dance with the Devil, Make Sure You Pick the Music...


Chart OF THE DAY: If You're Going to Dance with the Devil, Make Sure You Pick the Music -  chart of the day


There are some investor meetings that can be boring and many times you walk away saying to myself “why did I even waste my time; I did not learn anything.”  But this meeting was different and I decided to sit in the front row.  Maybe it was because Nelson Peltz was going to say a few words and I wanted to make sure I got a good look. 


History may not repeat, but it certainly does rhyme; I have made this call a least a dozen times in my career and two of them in the last two years (SBUX in 2009 and EAT in 2010).  Senior management is finally getting down to doing what should have been done two years ago – letting the Wendy’s brand thrive on its own.    


Wendy’s is following the classical rinse and repeat process of successful restaurant turnaround stories: simplify operations by shedding any surplus, dilutive brands that are distracting management and focus on executing the core business to the highest level possible.  Today’s investor meeting shed plenty of light on the progress WEN is making on this path and, while some question marks remain, I was convinced that the painful lesson of the Arby’s merger has been fully absorbed by management and they are now poised for significant growth over the longer term.   The presentation, in its totality, put forth a frank account of the errors that WEN had made in terms of operations and a convincing list of steps it is now taking to turn around the concept. 


The meeting obviously kicked off with Wendy’s new breakfast, supplied by Wendy’s, and the team was quick to tell the audience about the new rollout.  According to management, the day part has the potential to add $150,000 to the concept’s $2.4 million in average unit volumes.  The immediate success of breakfast is not critical, to the degree that management does not build in a significant expectation on what it will add to same-store sales growth.  They will only have it in 1,000 stores by the end of next year and only 2/3 of the system will be able to execute it. 


The most critical element to the turnaround is management’s plan to upgrade the menu to enhance the quality of its offerings.  This new menu strategy focuses on introducing new products that compete with some of the more premium products and brands in the QSR segment.  The company has rolled out new “natural cut” French fries that rival the style of those available at Five Guys.  Additionally, the company will be rolling out a new hamburger called the “golden burger” which is expected to compete with the quality offered at In-N-Out Burger, Five Guys and other premium prices products.  The new burger will be rolled out nationally during the second half of 2011.  They will also follow up in the coming months with a new chicken sandwich to compete with Chick-fil-A.


While unit growth is not currently a focus it remains another vehicle through which management aims to grow the top line.  WEN announced a new partnership in Argentina with Desarollo y Gestion (D&G), to open 50 franchise stores.  Other opportunities are being pursued in Brazil, China, and Japan, and management is optimistic about the prospects in all three markets.  Interestingly, while WEN expects earnings exposure to international markets to increase, it also plans on opening 1,000 new stores on top of the current ~6,000 unit restaurant base.


Aiming for operational excellence was a key theme of the presentation and management outlined how it can have the obvious benefit on margins but also on top line trends.  One fine example is the drive-through window.  WEN detailed the significant uptick in sales seen as operational creases were ironed out and speed-of-service times were reduced.   I’m assuming it is for Wendy’s in the U.S., but management said that 67% of sales are made at the pickup window. 


Management is also using a pricing model to best calculate stores where there is room for pricing versus those stores where a price increase would likely result in a drop off in traffic.  Remodels are another strategy that the company is following to support sales; 75 remodels are scheduled for 2011. 


The presentation elaborated briefly on the current standing of the share repurchase program, which was, of course, interrupted because of the filing of a 13-D by Trian, WEN’s largest shareholder.  For this reason, it was explained, there were no stock repurchases in the fourth quarter.  The current intention is for repurchases to resume as soon as possible.


In terms of outlook, management reiterated the guidance disclosed in yesterday’s preannouncement of 4Q and FY2010 earnings.  For 2011, the company outlook expects same-store sales growth of 1-3% at Wendy’s North America company-operated restaurants and an improvement of 30 to 60 basis points in Wendy’s company-operated margins.  Capex is projected to be $145 million.  Unit development is expected to include 20 company stores in North America, 45 franchise stores, and approximately 50 international franchise stores.  From a cash flow perspective, the company aims to produce annual EBITDA growth of 10-15%, beginning in 2012.  Commodity inflation is projected to be around 2-3% for the company with beef costs impacting on approximately a one-month lag basis.  Chicken is contracted out on an annual basis and will offset some of the inflation beef is causing in the commodity basket presently. 


While focusing on simplifying the menu and the process (Burgers, Fries, Cokes), the chain is also focusing on simplifying the marketing strategy.  Using the namesake of the brand and daughter of the founder, Wendy Thomas, in select advertising is just one of the initiatives management is using to heighten WEN’s profile among QSR customers of which, according to the presentation, 60 million visit QSR restaurants 4 or 5 times per week in the U.S. 


The most positive and all-important take away from this investor day was the resounding “yes” management gave to me in response to my question about whether or not this definitively meant that Wendy’s, as a concept, would now be given sole attention of management and room to breathe.  The response was important and the benefits obvious.  Management teams across the space are generally better served focusing on a few simple operational tasks and executing on them clinically.  The sale of Arby’s allows WEN to forget about trying to right the wrongs of Arby’s and invest capital and management time into Wendy’s.  Of course, from a dollar perspective, the reduction of corporate G&A to support a single brand is also a positive.  Beyond that, focusing on the core menu will also yield benefits.  Hamburgers, fries, salads, value, and chicken comprise 70% of total sales for WEN.  That is a slice of the pie worth getting right.


As with all turnarounds there is always the X-factor.  The X-factor in this case is the implication(s) this has for the employees and the franchise system.  You generally see most people be revitalized by the new initiatives and the stores tend to see a higher level of execution and the turnaround progresses.  This is why when the ball starts rolling it goes further and lasts longer than most expect it to.  This was clearly evident in the most recent quarter that SBUX reported. 


We will have more details around valuation in the coming days. 


Howard Penney

Managing Director

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.