Fooling The People

“If you once forfeit the confidence of your fellow citizens, you can never regain their respect and esteem.”

-Abraham Lincoln


In the same quote Lincoln went on to point out that while “it is true that you may fool all of the people some of the time… and “you can even fool some of the people all of the time”… “but you can’t fool all of the people all of the time.”


So how is The Ber-nank doing in Fooling The People of the United States of America that the inflation of the US stock market is good?

  1. Confidence – in the week that The Inflation he is playing for in US stocks was booming (SP500 +2.7% last week), the weekly ABC US Consumer Confidence reading got hammered down to -46 versus -41 in the week prior (those are minuses).
  2. Trust – in the latest poll, when asked “who do you think the Federal Reserve Chairman Ben Bernanke cares about more, Wall Street or Main Street?”, only 20% replied Main Street (even Geithner had a higher trust reading than Bernanke on that score).
  3. Invested Position – “91% of all equity holdings in the United States held by the top 20% income group in the country. The top 1% own 38% of all the equity valuation.” (from David Rosenberg and Zero Hedge yesterday).

Now if The People of America were as stupid about what’s in their wallets as the Fed must think they are, they’d be plowing through their snow covered driveways and barging through the doors at The Lehman Brother to open a brokerage account. Oh, wait – The Lehman Brother is gone – maybe that’s why Americans aren’t investing their confidence and trust in The Ber-nank’s inflation. Maybe it’s the snow and closed for business thing?


Whatever your opinion of the Incumbent 23rd Chairman of the Federal Reserve, odds are that if you are in the business of being long the inflation (stocks), after a +93.8% rally from the March 2009 low, you’ve got to be happy. I am.


But, to be crystal clear on this, you and I are not America  - and neither is a humble looking central planner who thinks he knows exactly how this is all going to play out. Some Americans were fooled by that when the perma-bulls were cheering Bernanke on to provide the “shock and awe” of interest rate cuts in late 2007 and early 2008. But you can’t fool all of America again on this Mr. Bernanke – not this time.


Sadly, at the end of the day this is all about storytelling and the worst part about the marketing message behind the Austrian versus Keynesian economic views right now is probably that Ron Paul is the one delivering the commercials. He’s much better in print than he is on TV. What Americans really need is Robert Rubin to massage this concept of how debauching the US Dollar perpetuates American unemployment.


Unfortunately, Robert Rubin isn’t for hire anymore. Last I heard he is living large and licking his Doritos fingers, forgetting that he didn’t foresee another sovereign debt default cycle pending.


Back to Fooling The People


In a recent survey from Selzer and Co., 7 out of 10 respondents said “the US is deliberately keeping the dollar low against other currencies, while only 1 in 4 think it’s letting the market decide the value of the greenback.”


I get it. The world’s largest bond fund manager gets it (see Bill Gross’ latest monthly letter). The American People get it. The Chinese get it. And now, even 2 of The Ber-nank’s Federal Reserve Presidents came out yesterday to remind the land of the living that they get it!


Yesterday, Federal Reserve Bank of Richmond President Jeffrey Lacker and Federal Reserve Bank of Dallas President Richard Fisher came out explicitly acknowledging both The Inflation trends in the global economic system and the need for the independent Federal Reserve to address it.


“I will be at the forefront of the effort to trim back our Treasury holdings and tighten monetary policy at the earliest sign of inflationary pressures are moving beyond the commodity markets and into the general price stream.”


Well done, Mr. Fisher.


What’s most important about these dissenting Fed Head comments is the timing. Today, The Ber-nank is going to testify in front of the Congress that what is scaring the living daylights out of the US bond market (inflation) is wrong and that he, our Almighty Central Planner, is right.


This isn’t a centrally planned Russia folks. This is America  - and the next person who tells you our red, white, and blue free-market is what it used to be needs to go back and re-read the Constitution. As Steve Hanke states most succinctly, “the Constitution was designed to govern the government, not the people.”


Before you listen to Bernanke’s politicized view this morning, let me leave you with three Austrian economic thoughts (paraphrasing von Mises), because Ron Paul is going to have two thought leaders from this school lay down the opposite side of the Keynesian case today at the sub-committee meeting on Domestic Monetary Policy (that Bernanke won’t attend) in Washington, DC:

  1. Controlling Prices - “The metaphorical expression “price level” must never be used… with prices there is no such thing as a “level”… prices do not change at to the same extent at the same time” … as a central planner promises.
  2. Inflation’s Social Stratification - “When inflation starts, different groups within the population are affected by this inflation in different ways. Those groups who get the money first gain a temporary benefit.”
  3. Devaluation of a Currency - “If one devalues the currency and the workers are not clever enough to realize it, they will not offer resistance against a drop in real wages, as long as nominal wage rates remain the same.”

Sorry, Mr. Bernanke. Apparently America’s Main Street workers are clever enough. America’s small business owners aren’t hiring because they get this too. Best of luck out there in the Twitter-sphere and YouTube channels of modern day transparency in continuing to fool some of the people from here on in – the 60 Minutes gig isn’t working.


My immediate-term support and resistance lines for the SP500 are now 1303 and 1332, respectively. God Bless America.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fooling The People - d1


Fooling The People - d2


TODAY’S S&P 500 SET-UP - February 9, 2011

Equity futures are trading below fair value as the recent upward trend looks to be stalling amid a lack of fresh catalysts. As we look at today’s set up for the S&P 500, the range is 29 points or -1.63% downside to 1303 and +0.56% upside to 1332.


On Tuesday, indices again found the path of least resistance to be to the upside, but other than the improving economic backdrop there was little obvious justification for the performance; especially given China's interest rate move.



  • MBA mortgage applications index fell 5.5% week ended Feb. 4.; Refis down 7.7%, purchases fell 1.4%; both had gained prior week
  • Rate on 30-Yr fixed-rate mortgage rises to 5.13%, above 5% for first time since April 2010, below 5-yr avg of 5.66%
  • 8:30 a.m.: WASDE commodities
  • 10 a.m.: Fed Chair Bernanke testifies at House Budget Committee
  • 10:30 a.m.: DoE inventories
  • 1 p.m.: U.S. to sell $24b notes
  • 6:45 p.m.:  Fed’s Lockhart speaks on U.S. outlook in Atlanta


  • Bullish sentiment increases to 53.4% from 52.7% in the latest Investor's Intelligence poll; Bearish sentiment increases to 23.3% from 22.0%; those expecting a market correction decreases to 23.3% from 25.3%.
  • Morgan Stanley may turn its remaining proprietary-trading group into an electronic client-trading unit, two people with knowledge of the matter told Bloomberg
  • St. Joe hires Morgan Stanley to help it explore strategic alternatives including a merger or sale; will consider a revised business plan, operating partnerships, JVs, strategic alliances, asset sales, strategic acquisitions it says
  • News Corp.’s Fox network says it may drop some affiliates if the local TV stations are unwilling to pay a program fee sought by the broadcaster. Says it will seek direct talks with station owners after nine months of discussions with the affiliates’ board “made no progress”. Fox is demanding a share of so-called retransmission fees that stations are starting to receive from cable and satellite-TV systems for access to local signals
  • London Stock Exchange agreed to buy Toronto Stock Exchange owner TMX Group for C$3.2b
  • House Ways and Means trade subcommittee holds hearing on U.S. trade policy issues. 9 a.m.
  • House Oversight subcommittee on TARP holds hearing on the coming crisis in state and municipal debt. 9:30 a.m.
  • House Financial Services subcommittee holds hearing on job creation and the unemployment rate. 10 a.m.


There were some bright spots for stocks today, including a continued pickup in small business sentiment, another round of M&A and corporate actions activity and some heightened attention surrounding President Obama's efforts to improve the administration's relationship with the business community. 


Day 2 of perfect = 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.59%, S&P +0.42%, Nasdaq +0.47%, Russell 2000 +0.66%
  • Month-to-date: Dow +2.87%, S&P +2.99%, Nasdaq +3.59%, Russell +4.15%;
  • Quarter/Year-to-date: Dow +5.66%, S&P +5.32%, Nasdaq +5.43%, Russell +3.83%
  •  Sector Performance - (7 sectors down and 2 up): - Consumer Disc +1.19%, Industrials +0.67%, Financials +0.71%, Consumer Spls +0.48%, Tech +0.41%, Materials +0.32%, Healthcare +0.29%, Utilities (0.01%), Energy (0.34%)


  • ADVANCE/DECLINE LINE: 841 (-332)  
  • VOLUME: NYSE 886.27 (+0.75%)
  • VIX:  16.28 -2.89% YTD PERFORMANCE: -10.93%
  • SPX PUT/CALL RATIO: 1.37 from 1.85 (-25.67%)


Treasuries were weaker for a seventh straight session today. Some of the pullback was chalked up to a disappointing three-year note auction, while supply concerns are expected to remain in focus ahead of tomorrow's $24B 10-year note auction and the sale of $16B worth of 30-year bonds on Thursday.

  • TED SPREAD: 16.70 -0.507 (-2.949%)
  • 3-MONTH T-BILL YIELD: 0.15% -0.01%
  • YIELD CURVE: 2.89 from 2.90


  • CRB: 337.25 -0.06%; YTD: +1.34%  
  • Oil: 87.30 -0.62%; YTD: -5.34% (trading +0.30% in the AM)
  • COPPER: 455.30 -0.02%; YTD: +2.38% (trading +0.32% in the AM)  
  • GOLD: 1,362.58 +1.38%; YTD: -3.95% ( trading -0.35% in the AM)  


  • Natural gas futures declined to the lowest price in almost 12 weeks on forecasts of moderating temperatures that may limit demand for the heating fuel. 
  • Silver futures for March delivery gained 92.8 cents, or 3.2 percent, to settle at $30.271 an ounce on the Comex. Earlier, the price reached $30.285, the highest since Jan. 4.  Silver, which has wider industrial applications than gold, rose 84 percent last year and touched a 30-year high of $31.275 on Jan. 3, before dropping as low as $26.30 on Jan. 28.
  • After an 11-year moratorium on GMOs, Mexico had approved a small project with Monsanto and two other companies, but isn’t ready to go further into a full pilot program.  “Corn is a staple food crop in Mexico, intricately intertwined with the country’s cuisine, history, and culture,” notes Beth Buczynski at Care2. “Authorities are concerned that Monsanto’s genetically modified corn will contaminate native species, and could cause both health and environmental issues.”
  • Wheat futures rose to a 29-month high on signs that countries are boosting grain inventories after food inflation spurred unrest in North Africa.  Egypt, the world’s biggest importer, bought 55,000 metric tons from the U.S. in a tender on Feb. 5. Iraq, Turkey, Bangladesh and Algeria have issued tenders since Feb. 6, and Iran and Saudi Arabia may be in the market “soon.” 


Euro gains vs most peers while New Zealand dollar falls against all of its major counterparts after Finance Minister Bill English said it was “possible” economy slipped into recession in 2H.

  • EURO: 1.3666 +0.90% (trading -0.23% in the AM)
  • DOLLAR: 77.999 -0.04% (trading +0.03% in the AM) 


  • FTSE 100: (0.35%); DAX: (-0.04%); CAC 40: (0.15%); IBEX: (0.31%) (as of 06:45 EST)
  • European markets mainly trade lower with M&A activity and corporate results influencing individual market direction.
  • London Stock Exchange and TMX Group to merge, with LSE shareholders ending up owning 55% of the combined group, expected to be accretive to adjusted EPS for both companies
  • There are no major MACRO data points
  • Bundesbank President Axel Weber will drop out of the race to succeed Jean-Claude Trichet as head of the ECB, Reuters said


  • Nikkei; (0.17%); Hang Seng (1.36%); Shanghai Composite (0.89%)
  • Asian markets fall the most in a month, led by energy, commodities shares, after China yesterday raised one-yr deposit and lending rates.
  •  Hang Seng falls to YTD low, led by developers, while basic resources shares fall as copper retreats.
  • Commonwealth Bank of Australia rose 2% when its results beat estimates, bringing other banks up in sympathy and powering the market to a small rise.
  • Morning gains in Japan were limited by caution about China’s performance and profit-taking in banks turned the market negative in the afternoon. China-related shares fell.
  • China reopened after a long break by falling in reaction to the higher interest rates. Property, commodity, and financial firms went down on worries that higher borrowing costs will stifle consumer demand.
  • Chinese developers fell 2-4% to lead Hong Kong down.
  • China January HSBC PMI 52.0 vs prior 53.1.
  • Japan January consumer confidence +1.0 pts m/m to 41.1.
  • Tokyo January office vacancies 9.04% vs prior 8.91%.

Howard Penney

Managing DIrector




Still worried about Q2 industry RevPAR but MAR should beat Q4 and Q1 probably needs to go higher.



We project MAR will report Q4 Adjusted EBITDA and EPS of $363MM and $0.41. Our numbers are 8% and 13% ahead of consensus, respectively, and above company guidance of Adjusted EBITDA of $331-346MM and EPS of $0.33-$0.36.  At current valuations, some of the upside may be baked into these stocks.  This was evident when Starwood reported its results last week.  However, given the magnitude of the beat we are expecting, investors could move MAR higher.


We also think MAR could raise Q1 guidance.  We’re already ahead of the street for 1Q2011 but in-line for FY2011.  We continue to believe the Street is overestimating Q2 industry RevPAR.  Our research shows that the April-July period in 2010 was one of pent up demand and in terms of dollar RevPAR, was much stronger than the rest of the year.  The math shows that the comparisons during that period of 2011 will be very difficult.


For more details on our assumptions for Q4 please see below:



  • RevPAR growth of 7.4% vs. 6-8% guidance
  • Management and franchise fees of $385MM vs. guidance of $370-380MM
    • 1.5% growth in managed rooms and 6.1% growth in franchised system-wide rooms
    • 9.3% growth in base management fees to $178MM
    • 20% growth in incentive fees to $71MM
    • 14.5% growth in franchise fees
  • Owned, leased, corporate housing and other revenues of $356MM producing gross margins of $39MM compared to guidance of $40MM
    • Owned & leased room revenue up 8% to $121MM
    • 5% YoY increase in F&B & other revenues
    • $19MM of branding fees and $4MM of termination and other fees
  • $195MM of contract sales and Timeshare segment results of $48MM vs. guidance of $190-200MM of contract sales and segment results of $45-50MM
  • Other stuff:
    • $25MM of gains and other income (in-line with guidance)
    • $51MM of net interest expense (guidance of $50MM)
    • $10MM Equity loss (in-line with guidance)

Early Look

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The Superbowl may have been a good calendar catalyst for Pizza restaurants, but commodity costs ran straight up the middle against them over the last week.  Of the commodity costs we monitored, cheese prices led the way, gaining +6.4% on the week.  The week was more even for commodities overall, with beef, chicken, coffee, and sugar inflation notably slowing.  Below, I give my take on a couple of important items that made major moves this past week.

  • I would obviously be remiss not to elaborate on the move cheese prices made week-over-week and its implications for the restaurant space.   Especially for the Pizza concepts (DPZ, PZZA, Pizza Hut), it is obviously a concern that costs are continuing to rise.  Obviously contracts provide insulation from price volatility but, to the extent that those contracts are up for renegotiation, higher prices are a headwind.  Particularly for DPZ, facing a difficult compare in the first quarter of 2011, this is a factor to keep a close eye on.


  • Wheat prices are obviously important for many restaurant companies and they rose 4.6% week-over-week.  News of countries building grain inventories as a reaction to food inflation and possible droughts impacting wheat crops in China drove prices higher recently.  PNRA expects wheat costs for 2011 to be roughly flat versus 2010, as the company currently has nearly 75% of its wheat costs locked in for 2011, modestly below the 2010 price.   Looking at the chart below, it is clear that the company is hoping that the easier comps, from a wheat cost perspective, offer them some relief.  If prices go higher, wheat could cause some margin pressure for PNRA in 2H11.


  • Chicken Wing prices declined 5.8% week-over-week.  BWLD continues to enjoy chicken wing price favorability.





Howard Penney

Managing Director

Nike: Our Take on Mgmt Chgs

Nike is losing some good people here. But the reality is that these changes are probably needed, and set the stage for a step-up in acquisition activity. 


First off, Nike has 35,000 employees globally. I'd challenge anyone (even many inside Nike) to even attempt to draw an organization table. It can't be done. It was hard enough when Nike was aligned by Region and by Product (i.e. US Footwear, Asian Apparel, etc...). But now it is aligned by Region, Product AND most importantly, by category (basketball, running, fitness, etc...). This is basically a 3-D matrix that is extraordinarily difficult to manage.


With that as a backdrop, let's look at the management changes and gage the impact. There are two that raised an eyebrow.


1) Eunan McLaughlin: Eunan has definitely put in his time and has been the consummate journeyman inside Nike. He started off as a sales rep in Europe in 1999, but by 2001 he was the country manager for Asia. In other words he was one of the key leaders in building up Chinese infrastructure. Then he became head of Europe in 2004, and ultimately came to the US to head up the affiliates in 2009. That last move, however, was probably not his first choice. He was in his element when running Europe and immersed in the world of growing the business with a particular emphasis on football.  Coming to the US to run a portfolio of brands including Converse, Cole Haan and Hurley was probably a step down.


2) Roger Wyett: Roger’s background is very circular, but oddly enough, it works in this context. He joined Nike in 1994, working his way up to head of Global Product Creation. After 6-years he left Nike for Disney where he headed up Global Apparel, Footwear and Accessories. Then he returned to Nike in 2005 to be President and COO of Hurley International -- yes, a business that's a fraction of the size he oversaw at Disney. Then in 2006 he became head of global apparel after Mindy Grossman left the company. About 18 months later, he became CEO of Hurley International (again). Now he's moving over to run the affiliates?  


While the affiliate brands are often view by the Street as the ugly red-headed stepchild -- keep in mind that Nike's most profitable business (Converse) falls under that banner. Also keep in mind that Nike is planning to step up acquisition activity this year. This role reports directly to Mark Parker, and Mark puts heavy emphasis on innovation. Roger has proven his ability to do this during his early days at Nike, then at Disney, and then again at Hurley. Not so when heading the behemoth $4bn apparel business for the Nike brand. I guess 3 out of 4 is good enough.


3) The most predictable response by the Street will be to an overwhelmingly positive reaction to Jan Singer's appointment as head of Global Apparel. It is warranted. Jan is good, and her stock has been on the rise at Nike. She's also had exposure to many investors over the past year. Jill Stanton is definitely a loss. But Wall Street does not really know her well enough to focus on her departure.



The bottom line here is that Parker put a design and innovation-focused manager (Wyett) in charge of a) a place where it's needed, and b) a place where acquired brands will need to quickly cross-fertilize with the rest of Nike. The other moves have their puts and takes, but they all still report to Eric Sprunk, who is the Mac Daddy of product inside Nike. He's not going anywhere but up.

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