The Chinese stock market is becoming more capitalistic as markets around the globe, including the United States, are becoming less capitalistic. Notably, as we mentioned in the “Early Look” on September 26, 2008, the Chinese government signed off on a plan to “allow margin lending and short selling” four days ago. Ironically, this Communist regime is providing investors more investing “freedom” as governments around the globe, led by the United States, have been banning short selling. Simply, we like to invest in markets where capitalism is expanding.
The CRB Commodities index, which is a compilation of 19 major commodities, reported its single largest down day since 1956 yesterday. This is deflationary. The steady decline of global commodity prices since their May / June 2008 peak has also been deflationary. Clearly, the roughly 70% decline in the Chinese market since its peak is already reflective of a slowing growth outlook, which has now morphed into consensus (see “Beijing Slowdown” in the Wall Street Journal today). We believe the second derivative of this slowing growth, commodity deflation, will serve as a positive catalyst for the Chinese market.
Finally, the Chinese Yuan appears to have put in a top in mid July 2008 versus many major currencies, in particular the US Dollar. As a country whose competitive advantage is cost to produce goods (labor) versus the rest of the world, the lower its costs are in its currency versus the currencies of its major customers, the more appealing its export outlook will become. The Chinese Yuan should only continue to decline as China has signaled a willingness to cut rates with its first easing in 6 years earlier this month. Chinese interest rates have a lot further to fall versus rates in the U.S. (Chinese benchmark rate is currently at 7.2% versus 2.0% in the United States).
This should help you put both the immediate term ("Trade") and intermediate term ("Trend") in context. As a reminder, as the facts change (i.e. the numbers in the model), our price levels change. These are point in time charts that refresh their levels every 90 minutes of trading.
If the US$ can hold this bullish "Trend", it should continue to deflate other asset classes from foreign currencies to commodities, globally. US denominated cash remains king.
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The Japanese government probably needs to stay out of its economy. This is another example why.
Contrast this with MGM MIRAGE, which pays no dividend but is also building a multi-billion project on the Strip: CityCenter. MGM has been struggling to raise project financing for CityCenter at the same time it is forced to consider its options to fund huge debt maturities on its own balance sheet in 2009 and 2010.
The liquidity line has clearly been drawn.
Once again, I am ranking the names in order of yesterday’s stock price performance worst to best:
TAST – A BKC franchisee that owns two regional brands with significant exposure to Florida. TAST has a leveraged balance sheet, with rising food and labor costs. On current numbers the stock is trading at 7x NTM EPS.
WEN – Looking for more clarity as we move into 2009, but it will face some challenges getting incremental customers in 2009. Could be a good place to hide, as expectations are low and the brand is strong
CKR – A regional player with a management team more concerned about the luxuries in life, like a private plane. CKR will be fine but will never get any respect because of management.
JBX – A strong, well run company. Unfortunately, $0.40 to $0.50 of JBX’s EPS growth comes from selling stores to franchisees. Once management get off this drug it’s safe to get in.
KKD – The shrinking violet…..
DPZ – Anything with leverage will get crushed and they have got it. Top line trend appear to be improving.
BKC – The best days are behind them and the street is universally bullish. I’m not a fan. A large part of the company’s success is the resurgence in the advertising campaign and that is definitely cyclical.
YUM – Where do I begin with this one? Without China there is not much here, because the U.S. business is a disaster. Management has leveraged the balance sheet at just the wrong time!!
SBUX – It’s been beaten and beaten again. We are closer to the bottom than the top. Not much management can do to offset the macro. Definitely low expectations
MCD – I still contend that 2009 is shaping up to be a disappointment for MCD. Definitely high expectations!
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