Ice Age: Positive Slope In the Yield Curve Emerging, Finally!

Over the past week the yield spread between 2 & 10 year Treasuries has expanded to the widest level seen since May of 2004. As the market vacillates between bailout euphoria and the ugly reality of recession, the yield curve’s volatility has been an obvious output, but so has been an emerging positive slope.

To be sure, falling yields on Bank issued debt, decreased LIBOR levels, and evidence of liquidity creeping back into the commercial paper market are all positive signs that the credit markets are starting to thaw, but history reminds us that the speed at which liquidity returns to normal may prove to be glacial.

In the meantime, the positive slope that is developing in the US yield curve is good for healthy banks and anyone with net cash – borrow short, lend long – remember? Those businesses requiring debt leverage are less attractive however. Cost of long term capital is rising while access to it continues to tighten (spreads widen).

Keith McCullough & Andrew Barber
Research Edge LLC

CKR – Taking the High Road on Discounting, But For How Long?

CKR reported its period 9 same-store sales results this morning. Carl’s Jr.’s comparable sales trend improved sequentially to up 1.6% from period 8’s 0.1% decline while Hardee’s slowed slightly to up 0.8% from 1.1%. Both concepts slowed, however, on a 2-year basis in both period 8 and period 9 (the first two periods of 3Q09) and have been declining since period 6 in 2Q09. This is somewhat concerning because both Carl’s Jr. and Hardee’s are facing more difficult comparisons in period 10 to close out the quarter and Carl’s Jr.’s tough comparisons continue into 4Q09. Management attributed its slowing trends in both period 8 and 9 to overall discounting, saying, “We believe competitors' aggressive discounting continued to negatively impact both brands sales results.”
  • It is interesting to note that CKR management made changes to its “Why Invest in CKE” section of its investor presentation highlighting the company’s defensive nature. The company supports this idea that it is well positioned to withstand tough economic times by pointing out that “fast food is not a luxury item” and “people are going to continue eating fast food.” The new presentation also includes a chart that looks at Carl’s Jr.’s same-store sales performance relative to overall QSR in other difficult times (attached below).

Eye On Leadership: "Obamerica"

As we mentioned in the Early Look this morning, we are beginning to proactively prepare for a Barak Obama victory in three weeks. The polls, news flow and every incremental data point seem to point to an Obama victory. In our opinion, this is a victory that could easily morph into a landslide.

The most recent national poll, from CBS-NY Times, has Obama with a 14-point lead at 53 – 39 in likely voters. This poll is obviously an outlier, but a noteworthy call out in that the last time this poll was taken, seven days ago, Obama only had a lead of 3-point lead in the poll.

The other indicators we are focused on include:
• The Real Clear Politics national poll average now that has Obama leading by 8-points and, for the first time ever, Obama is polling above 50% in the average;

• The Real Clear Politics electoral college poll average now has Obama/Biden at 313, McCain/Palin at 159, and Toss Ups at 67, so even if all states currently categorized as Toss Ups swing to McCain he will lose; and

• The Intrade Market now has Obama trading at 80.1, which means that if you buy Obama you only get a payout of 19.9 if he wins.

Absent an “October surprise” between now and November 4th, an Obama victory is almost a sure thing. The impact of this Obama momentum will also be felt in the congressional races. Increasingly, an expanding Democratic majority in the House and the potential for a filibuster proof majority for the Democrats in the Senate. Incidentally, the last time the Democrats won the Presidency, had a majority in the House, and filibuster proof majority in the Senate was Jimmy Carter in 1976.

While we could easily make the case that Barak Obama is the second coming of Jimmy Carter, the current Republican administration is hardly differentiating themselves as free market capitalists. As Allan Mendlowitz very aptly stated: “The Bush administration, which took office as social conservatives, is now leaving as conservative socialists.”

Daryl G. Jones
Managing Director

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Dear George, It's Time...

At the risk of sacrificing accuracy for verbatim, I will paraphrase what JPM's CEO, Jaime Dimon, just said on his quarterly conference call when asked about what he plans on doing with the $25B (bee-llion) that Paulson just passed over to him and the boys at “Investment Banking Inc”...

'While it we may NOT have needed the money, we'll GLADLY accept it'...

Is this what Hank Paulson had in mind in setting this entire country on fire with alarmist rhetoric? JPM doesn’t need the money!

This is beyond embarrassing. American integrity is being short sold by the world this morning. We can do much better than this. George, it’s time to fire Hank “The Market Tank”. He is crushing our retirement accounts. Bring in someone else and the ensuing market rally will make Monday’s melt-up look tame.

You used to have a man managing the Iraq situation as recklessly. His name was Rumsfeld.


Keith McCullough
Research Edge LLC

A ‘Must Read’ on an Underappreciated Issue

I can assure you that almost no one I talk to considers the Employee Free Choice Act a big deal. My Partner Todd Jordan has been all over this one. Here’s a ‘must read’ excerpt from his lodging note this morning that has implications across every industry. People in retail (including me) are looking at higher imported inflation, but are they looking at domestic employee wage pressure as unions rebuild after years of shrinkage? You can bet that Wal*Mart is looking seriously at this...
Brian McGough
“We will pass the Employee Free Choice Act. It’s not a matter of if, it’s a matter of when.” – Barack Obama

“Madam Speaker, I rise today in support of the Employee Free Choice Act, because the right to organize is essential to the path to prosperity for all Americans.” – Speaker of the House Nancy Pelosi

“Every single Senator ought to support this bill.” – Senate Majority Leader Harry Reid

These quotes should remove any doubt. If Obama is elected President, the Employee Free Choice Act will become law. Whether or not the removal of secret ballots in deciding union elections makes employees more free is not important. Since 1989, unions have contributed almost $500 million to political campaigns. Over 90% of that cash has gone to Democrats. The favor will be paid back by an Obama administration and a Democratic congress.

So what does this mean? The elimination of secret ballots will make it much easier to unionize. Secret ballots are the cornerstone of any modern democracy for a reason. People can vote without the pressure that an open petition would apply. More unions = higher wages and benefits for hotel, casino, and leisure companies to name just a few.

Todd Jordan
Managing Director

Early Read: Good Sports Apparel Numbers

Sports apparel sales continue to look good, despite the malaise out there in retail-land. The latest Sportscan numbers (for the week ended Sunday) were +5.2%. Trailing 3 week trend (which I think is far more relevant) is trending higher for $$, units and ASP. Better on the margin for FINL, FL, DKS and HIBB.

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