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TALES OF THE TAPE: WEN, DIN, MCD, PEET, GMCR, DPZ, CBRL, MSSR

Notable news items/price action from the past twenty-four hours.

  • WEN reported $0.01 ex-items versus the Street, in line with prior guidance from January 26th.  The company is guiding below the street on EBITDA but assuming the sale of Arby’s.  Affirming Wendy’s longer term target of 10% to 15% EPS growth, beginning in 2012.
  • WEN is to reopen stores in Japan, a market it quickly exited in 2009.  The company sees at least 71 stores in Japan in five years.
  • DIN reported 4Q EPS of $0.59 versus consensus $0.64.  Earnings included a $7.7M charge related to the default of an IHOP franchise.  Guidance for FY11 is for Applebee’s domestic system-wide same-store sales performance to range between 1% and 3% and company-operated restaurant level-margin of between 14.8% and 15.2%.
  • MCD traded poorly yesterday as headlines highlighted a decrease in its advertising spend and the movement of the brand from its core business to lattes and other beverages.  This is all confirmative of my Black Book of mid-January.
  • PEET continues to trade strongly following an upgrade yesterday that boldly stated that a deal would be done between PEET and GMCR by March 6th for Peet’s to enter the k-cup market.
  • DPZ gained on strong volume. 
  • CBRL gained 60 bps on accelerating volume following a difficult fortnight of trading.  Gasoline prices have been pressuring this stock.
  • MSSR traded down sharply on very high volume yesterday.  The stock was downgraded this morning.   On Tuesday, 4Q EPS came in at $0.22 ex-items versus $0.24.

 

TALES OF THE TAPE: WEN, DIN, MCD, PEET, GMCR, DPZ, CBRL, MSSR - stocks 33

 

Howard Penney

Managing Director


CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL

Initial Claims Fall to 368K

The headline initial claims number fell 23k to 368k (20k after the 3k downward revision to last week’s data).  Rolling claims fell 13k to 388.5k. On a non-seasonally-adjusted basis, reported claims dropped 33k WoW.  In most years, this week of the year sees 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. 

 

We are now seeing claims enter the 375-400k range where unemployment can begin to come down. Claims will need to hold this level and improve further in order to see any real movement in the unemployment rate, but this is clearly positive on the margin. It is worth noting 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%, it's 11%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11% actual rate as opposed to the 9% reported rate.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 1

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 2

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 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.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 4

 

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.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 5

 

Joshua Steiner, CFA

 

Allison Kaptur


THE M3: MACAU GOVT ASKS FOR LVS DETAILS; SANDS SUIT AGAINST JACOBS; WYNN; S'PORE GST

The Macau Metro Monitor, March 3, 2011

 

 

MACAU GOVERNMENT ASKS SANDS CHINA FOR REPORT ON US INVESTIGATION macaubusiness.com, Macau Daily Times

Secretary Tam said the Macau government has asked Sands China for a “detailed report” on the LVS investigations. Tam added that Sands China’s operations in Macau appeared to have proceeded “without problems” in recent years.  DICJ Director Neves said DICJ has received a report from Venetian Macau regarding the investigation. Venetian Macau stated that the case will not affect company operations and the company will cooperate fully with investigations. SJM CEO Ambrose So said he was aware of the investigation and stressed that SJM operations abide by local laws and follow the operating guidelines of a listed company. He said it is still too early to comment on whether the case will affect the development of Macau’s gaming industry in future. 

 

Meanwhile, Sands acting CEO Leven said that Sands China has dropped its CEO search and will maintain its current structure, with president and COO Edward Tracy leading the operation supported by Chief Casino Officer President David Sisk.  Nevertheless, Sands China is still looking for a representative to liaise with the government. “The person would have some government experience,” Leven remarked.

 

SANDS CHINA FILES CRIMINAL SUIT AGAINST JACOBS Macau Daily Times

Sands acting CEO Leven said, "Sands China has filed a criminal complaint (on Jan 21) in Macau for defamation and with evidence of extortion” against Steven Jacobs.  Leven confirmed he was aware of talks between Jacobs and representatives from Caesars Entertainment on a possible partnership in Macau, but he argues he told Jacobs a decision like that couldn’t be made without the involvement of Adelson. Leven said, “Gary Loveman eventually came to see us and did have a conversation with us. We talked about it, possibly for one of the sites here [on Cotai] – 3, 7 or 8 at the time – and then we tested it with some people here in Macau. The comment that we got [here in Macau] was they [Caesars Entertainment] wouldn’t get the licence. I delivered that message back to Gary Loveman. It never got to a negotiation, it was just a matter of enquiry."

 

WYNN POINTS OUT SOME KNOWN-UNKNOWNS Intelligence Macau

While it is a concern, IM says its smart for Wynn Macau to disclose in its annual report that it cannot guarantee that its room operators are always going to be in full compliance with Macau gaming regulations.  Room operators, given their murky backgrounds, are difficult for anyone, even the most compliance-minded concessionaire, to manage perfectly.  But it is interesting that Wynn Macau decides to disclose this risk in the midst of the LVS investigation.


GST FINE THE WAY IT IS, SAYS THARMAN Strait Times

Finance Minister Tharman Shanmugaratnam rejected calls by opposition Parliament member Low Thia Khiang to cut the goods and services tax (GST) from 7% to 5% or tweak it to combat inflation.  Tharman said this is not the solution since the bulk of GST is collected from higher-income groups and foreigners, so cutting the rate would benefit them more.


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CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL

Initial Claims Fall to 368K

The headline initial claims number fell 23k to 368k (20k after the 3k downward revision to last week’s data).  Rolling claims fell 13k to 388.5k. On a non-seasonally-adjusted basis, reported claims dropped 33k WoW.  In most years, this week of the year sees 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. 

 

We are now seeing claims enter the 375-400k range where unemployment can begin to come down. Claims will need to hold this level and improve further in order to see any real movement in the unemployment rate, but this is clearly positive on the margin. It is worth noting 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%, it's 11%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11% actual rate as opposed to the 9% reported rate.

 

 CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - rolling

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - raw

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 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.

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - s p

 

Yield Curve Remains Wide

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 278 bps is slightly wider than last week (274 bps).

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - 2 10 spread

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - spreads QoQ

 

Financial Subsector Performance

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

 

CLAIMS FALL SHARPLY - NOW AT A LEVEL WHERE UNEMPLOYMENT CAN START TO FALL - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur



Virtue's Lie

“So our virtues Lie in the interpretation of the time.”

-William Shakespeare

 

This morning Global Equity markets are begging for Libyan resolve. The Chinese and Russians talking down a US no-fly zone notwithstanding, fidgety bulls are trading on a tick with the direction of the price of oil. That is “the interpretation of the time.” That price volatility is also becoming this market’s greatest risk.

 

The longer term risk management question as to the pace of Global Inflation Accelerating remains – if peace and love were to breakout across the Middle East tomorrow, will that stop the world’s reserve currency from being debauched?

 

Looking at the Global Currency market’s real-time vote on money printing, Ben Bernanke’s 2-day Semi-Annual Storytelling on US Monetary Policy was a disaster. Whether The Ber-nank chooses to be willfully blind to this or not, the US Dollar Index is now down for 8 of the last 10 weeks and collapsing to lower-lows.

 

Proving that petrodollars are indeed affected by the dollar’s price or that US Dollar priced inflation at the pump is a consumption tax on US growth is a trivial exercise. What isn’t trivial to the American public is the math. And that’s not because the math isn’t trivial. It’s because we have allowed an Almighty Central Planner to garner so much political power that he can not only obfuscate things like math – but make up his own interpretations of the times.

 

Before I get into Bernanke’s definition of what the US Dollar is (Ron Paul asked him for it yesterday), here’s the math on the inverse correlations between US Dollars and things that are inflating:

  1. Oil = -0.86
  2. Gold = -0.90
  3. CRB Commodities Index = -0.90

*Note to Fed: this correlation risk is running extremely high

 

And if you want the R-squares on these relationships they run between 0.74-0.82, so the correlation between what the US Dollar is doing and inflation is doing is crystal clear. Now some academic brainiac who is defending the Keynesian Kingdom of thought is going to quickly say something in response about “causality versus correlation” and, while there may be differences in certain scientific exercises, it’s a crock when it comes to analyzing the Fed’s mandate.

 

The Fed’s official marketing mandate is “price stability.” Whereas the Bernanke Fed’s operative has been to print money and inflate. He has only raised interest rates ONCE (2006) and he has overseen the highest levels of PRICE VOLATILITY that modern day markets have ever seen. Ever is a long time.

 

What is causality? What are the root causes of inflation? Is the global market place or The Bernank going to resolve this debate? Mr. Macro Market all but evaporated the Keynesians with The Inflation of the 1970s – are we looking to roll the bones to see if we get one of those again? (see the chart below of long-term median price inflation going back to the year 1500 from Reinhart & Rogoff’s This Time Is Different, page 181)

 

First, to attempt to briefly address some answers to these questions, let’s define what the US Dollar and Causality are:

  1. Causality (per Wikipedia) – is the relationship between an event (the cause) and a second event (the effect), where the second event is understood as a consequence of the first (agreed).
  2. The US Dollar (per Bernanke yesterday) – is the buying power of a piece of paper for things that people actually need to buy (agreed).

Now, since Bernanke says there is no inflation, he says the “price stability” and buying power of the US Dollar are just fine. And every American who doesn’t have a car service take them to work will tell you that’s the most ridiculous conclusion they’ve ever heard. In fact, most Americans think Bernanke is simply part of the government lying to them about real-world inflation – and you know what, most Americans aren’t as stupid as Bernanke must think they are – they are right.

 

Back to causality - to understand the cause of inflation, one must study the history by which The Inflation is priced – fiat currencies:

 

Pre-WWI

  1. 1913 – US Federal Reserve Act allows the US to move towards a money printing model that would eventually abandon the Gold Standard
  2. 1917 – US Treasury is given discretion to issue US Treasury Debt (to finance War, not national deficits and political careers)
  3. 1919 – Post WWI, 60% of Global Reserves are denominated in US Dollars

Post-WWII

  1. 1950’s – France ran deficit and devaluation policies (debauching the franc and France’s currency credibility)
  2. 1960’s – Britain ran deficit and devaluation policies (debauching the pound and Britain’s currency credibility)
  3. 1970’s – USA ran deficit and devaluation policies (debauching the dollar and America’s currency credibility)

Do we need to bring back a great American leader (Herb Brooks) to line The Bernank up on the blue line and repeat – “Again”… “Again”… “Again”? Or do we need a Miracle? Developed economies (including our own) have tried this over… and over… and over again with the cause (politics) and effect (inflation) being the same.

 

To make matters worse, it appears that the Big Government Spenders of longstanding European and modern American ilk haven’t learned a damn thing from all this. Bernanke seems readily prepared to blame any unintended consequences associated with this US Dollar Crisis on either Congress or someone in the Middle East. Gotta love the accountability in that. ‘Congress needs to stop spending, but I need to keep printing’ – he said it, not me.

 

My bearish view of Bernanke’s process isn’t a new one. Neither is managing the systemic risk that the Federal Reserve imposes on global market prices. Anyone who has been managing market risk for the last decade has been paid to accept and understand that the Greenspan/Bernanke interpretations of the times have not worked. As the late Murray Rothbard (distinguished Austrian School of economics professor) wrote in “The Case Against The Fed” in 1994:

 

“The Federal Reserve System is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations… and this strange situation, if acknowledged at all, is invariably trumpeted as virtue.”

 

Maybe it has become the virtue of the few who hold centralized power in the palm of their hands – but this is not the virtue of the American Constitution. Neither is it the virtue of this Canadian who thought he was building an American family and firm under a President’s marketing pitch about Transparency, Accountability, and Trust. This virtue is a lie.

 

My immediate term support and resistance lines for the SP500 are now 1291 and 1319, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Virtue's Lie - f1

 

Virtue's Lie - f2


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