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SHORT INTEREST UPDATE

Looking at recent short interest moves in the restaurant space, it is interesting to note the increase in casual dining short interest versus quick service.  Below I go through some important takeaways:

  • CAKE is seeing short interest increase dramatically.  This company has an average check problem and the prospect of rising meat and dairy costs obviously doesn’t help the company’s outlook.
  • PFCB, despite a marginal uptick over the past two weeks, has seen short interest come down significantly of late.
  • CHUX is the perennial under-performer and the shorts piled into this ahead of the most recently reported quarter.
  • MCD remains the Teflon Don of the restaurant space – this will change in 2011.
  • CMG short interest remains low but ultimately the tide will reverse.  Labor cost efficiency, part of the secret sauce that footed the bill for organic, spot market, Food With Integrity, are going higher.  There is complacency here and I anticipate a change here when the music stops.
  • SBUX and PEET saw short interest rise while GMCR ticked down.  I believe that the PEET shorts are playing with fire here and GMCR is a much more attractive target on the short side.

SHORT INTEREST UPDATE - short interest historical 210

 

Howard Penney

Managing Director


JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K

Initial Claims Show Further Improvement

The headline initial claims number fell 33k WoW to 383k (36k after a 3k upward revision to last week’s data).  Rolling claims fell 14.5k to 415.5k. On a non-seasonally-adjusted basis, reported claims fell 26k WoW.  Year-to-date are defying the trend we've seen in recent years. In most years, the first few weeks of February see an uptick in non-seasonally-adjusted claims.  This year, that increase has not occurred, and the strength is showing through in the seasonally adjusted series. 

 

Rolling claims (415k) are now getting close to the 375-400k range at which the unemployment rate should start to come down. This week’s print (383k), the lowest since mid-08, falls squarely into that range. If this level is held, we would expect to begin to see unemployment improve, assuming claims hold this level or improve further. 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 9.0%, it's 11.0%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.0% actual rate as opposed to the 9.0% reported rate.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 1

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 2

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 3

 

One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis. Certainly, today's claims print augurs well for further upside on this basis.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 5

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - 4

 

Joshua Steiner, CFA

 

Allison Kaptur


JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K

Initial Claims Show Further Improvement

The headline initial claims number fell 33k WoW to 383k (36k after a 3k upward revision to last week’s data).  Rolling claims fell 14.5k to 415.5k. On a non-seasonally-adjusted basis, reported claims fell 26k WoW.  Year-to-date are defying the trend we've seen in recent years. In most years, the first few weeks of February see an uptick in non-seasonally-adjusted claims.  This year, that increase has not occurred, and the strength is showing through in the seasonally adjusted series. 

 

Rolling claims (415k) are now getting close to the 375-400k range at which the unemployment rate should start to come down. This week’s print (383k), the lowest since mid-08, falls squarely into that range. If this level is held, we would expect to begin to see unemployment improve, assuming claims hold this level or improve further. 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 9.0%, it's 11.0%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.0% actual rate as opposed to the 9.0% reported rate.

 

 JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - claims rolling

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - claims raw

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - claims nsa

 

One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis. Certainly, today's claims print augurs well for further upside on this basis.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - s p and claims

 

Yield Curve Continues to Widen

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 42 bps wider than 4Q.  The current level of 284 bps is slightly wider than last week.

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - spreads

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - spreads QoQ

 

Financial Subsector Performance

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

 

JOBLESS CLAIMS BREAK THROUGH 400K, ROLLING CLAIMS APPROACHING 400K - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


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The World's Danger

“The world is not dangerous because of those who do harm, but because of those who look at it without doing anything.”

-Albert Einstein

 

One of the most influential books that I have read in the last few years has been “Einstein: His Life and Universe” by Walter Isaacson. I say most influential because it fortified something within me that the best teams I played on took to battle every day on the ice. Courage.

 

If you are going to play this globally interconnected game of risk management at the highest level, you need to have the confidence and courage to play it with everything you’ve learned. You have to trust yourself and your process. You have to accept its weaknesses. You have to maintain opposing thoughts in your mind and remain calm.

 

You also have to be able to challenge accepted dogma, groupthink, and consensus when you have an opposing point of view.

 

Now that America’s Almighty Central Planner has laid down the Keynesian consensus, it’s time to take this puck right to the net on him and show the crowd what’s going on in this world outside of the bubbles that Ben Bernanke admits he never realizes he’s in:

 

To recap, Bernanke’s conclusions in his testimony before Congress yesterday were as follows:

  1. US Monetary Policy doesn’t affect Global Inflation
  2. US Inflation is benign
  3. US Dollars are “relatively attractive”

Let’s go through these in reverse order, given that’s how I’d weight the risk implied by a man with this amount of power who looks at the world right now without doing anything:

 

1.  US Dollar – after a +1.3% three-day recovery ahead of Bernanke’s testimony, the US Dollar Index dropped immediately following his aforementioned comments and is now down for the 6th out of the last 7 weeks. The world’s currency market votes on credibility real-time.

 

With the US Dollar being bearish across all 3 of our core risk management durations (TRADE, TREND, and TAIL)… and without any respect or support from the manipulator of the world’s reserve currency, I don’t see why we shouldn’t be modeling a probable scenario analysis for another US Dollar crisis (i.e. a retest of its prior lows).

 

 

2.  US Inflation – while Bernanke did point out that central banks hold more than 60% of their foreign currency reserves in US Dollars, he forgot to remind himself that “the Dollar is used in 85% of all foreign exchange transactions worldwide.” (Barry Eichengreen, “Exorbitant Privilege”)

 

Furthermore, there isn’t one major asset class in the world right now that implies that inflation expectations are low. Sure, the Fed’s compromised and conflicted calculation of inflation is benign, but we’re not willing to accept that as gospel. Here’s three ways to look at inflation:

 

A)     Bonds – US Treasury and Emerging Market bonds have been going straight down, literally, since QG2 was introduced at the beginning of November of 2010. Inflation is bad for bonds. Bernanke is implying the entire global bond market has this wrong.

 

B)      Stocks – Emerging Market stocks have been getting absolutely crushed since QG2 in November, 2010 and in the US stock market there’s a huge sector performance divergence embedded in the SP500 that is also inflationary. The S&P Energy Sector (XLE) is the best sector of the 9 we track for 2011 YTD at +7.51%, while the S&P Consumer Staples Sector (XLP) is the worst at +0.75% YTD. Ben, who is taking it in the margin? Bingo, the American consumer.

 

C)      Corporations – Yesterday on the Coca Cola conference call (a relatively large company with a global footprint) this is what management had to say about inflation - citing bills for juice, plastics, and sweeteners, they saw a 60% ramp in cost of goods sold in the October to December period. Management went on to say that they’ll need to raise prices on beverages in the US in 2011 as it faces $300-$400M in cost increases from commodities. McDonald’s, Proctor & Gamble, and Sysco Foods have had similar comments.

 

 

3.  Global Inflation – in a shining moment for his academic dogma, Bernanke blamed the highest world food prices in the history of mankind on “emerging market demand.”

 

All the while, almost every single Emerging Market demand signal we measure sequentially is getting hammered as Global Inflation (which is priced primarily in US Dollars) slows last year’s cyclical economic recovery. Overnight, Indian stocks traded down another -0.74% taking the BSE Sensex to down -14.9% for the YTD as concerns of Asian growth slowing continue to spread to Thailand, Philippines, and Indonesia (down -2.1%, -2.8%, and -1.3%, respectively).

 

Pakistan, which is the world’s 6th largest population (so we think worthy of considering in light of The Ber-nank’s accelerating emerging market demand thesis), saw import demand DROP from +29% year-over-year growth in December to +3.7% year-over-year growth in January. Since commodity inflation was raging in January (with the USD down for 6 of the last 7 weeks), we’d have liked to have Ben’s rebuttal to that…

 

Now do I have courage here or common sense? Does Ben Bernanke’s new world order of the world’s reserve currency having no impact on global prices make any sense to anyone who isn’t levered long the inflation trade? How about this concept of the USA decoupling from the Rest of the World? These are important questions that, sadly, our 112th Congress didn’t have the analytical competence or courage to ask…

 

The World’s Danger remains a US Central Planner’s academic dogma.

 

My immediate term support and resistance lines for the SP500 are now 1306 and 1336, respectively. At 11AM EST, our Macro team will be hosting a conference call on one of the latest bubbles perpetuated by the Federal Reserve’s policy of zero percent interest rates in perpetuity – Munis (email if you’d like to participate).

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The World's Danger - aa1

 

The World's Danger - aa2



TALES OF THE TAPE: BWLD, DIN, CMG, CAKE, PNRA, COSI, SBUX, PEET, GMCR, EAT

Notable news items and price action over the past twenty-four hours.

  • BWLD reported strong earnings on Tuesday after the close and the stock gained 12.9% yesterday on strong volume.  I expect trends to decelerate in the back half of the year.  See the note published yesterday on BWLD for more details.
  • DIN reported same-store sales for the Applebee’s system at +2.9% for Q4.  Franchise same-restaurant sales increased 3.4%.  Company-operated same-restaurant sales increased 0.3%, with a decline in traffic offsetting higher average check.
  • CMG is reporting today after the close after a low-volume gain yesterday.  The stock is trading at over 18x EV/EBITDA NTM and consensus is calling for +9.9% comps for Q4, which would be a slowdown in two-year average trends from 3Q. 
  • CAKE is reporting today after the close after trading sideways yesterday. 
  • PNRA is reporting today after the close and investors will be keen to learn of their costs outlook given the level of inflation in wheat markets and almost-daily news items of inventory building and hoarding of wheat by governments.
  • COSI outperformed the QSR category yesterday after its performance moderated somewhat over the last month.  The 6.5% gain, complemented by accelerating volume, left the stock at $1.47, up 10% over the last thirty days.
  • COSI was initiated outperform yesterday by Northland Securities in what I believe to be the first of many people to hop on this bandwagon.
  • SBUX, PEET, and GMCR declined yesterday as coffee prices rose almost 2.5% in a day.  The prospect of further prices raises is clearly a concern.
  • EAT traded well yesterday, gaining 4.4% on strong volume.  The stock is up 12% YTD.  I maintain my positive outlook on the stock as margin enhancing initiatives are implemented and sales improve.

TALES OF THE TAPE: BWLD, DIN, CMG, CAKE, PNRA, COSI, SBUX, PEET, GMCR, EAT - stocks 210

 

Howard Penney

Managing Director


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