While there will always be issues around the use of discounting, the difficult economic environment leaves few other options. Recent NPD data suggests that discounting has been driving traffic in this tough economic environment, particularly when gasoline prices reached $4.00 a gallon. The key issue to watch - can restaurant companies develop promotions that consumers find attractive while maintaining margins?

It comes as no surprise that consumers are looking for savings in these tough economic times and some restaurant operators have responded by offering very attractive price points. Over the past three months, 23% of all visits to restaurants included some form of discounting. According to NPD, deal visits were up 9% versus last year. During the same period, non-deal traffic declined by 1%. For the past three quarters, all of the industry’s traffic growth has been driven by the resurgence of value positioned promotions.

While increased dealing can be found in both the Quick Service and Casual Dining segments, most of the increase in deal activity has taken place in the Quick Service arena. Over the past 3 months, QSR deal traffic was up 10% versus last years. During the same time, deal traffic was up 6% at Casual Dining restaurants. For both segments, non-deal traffic was negative.

In this environment, positive same-store sales can be a misleading indicator of a company’s health. Those companies that are discounting heavily today will pay the ultimate price in the end.

Loonie? Buying th Canadian Dollar...

We're looking to get long another currency other than the US Dollar. The Rydex Canadian Currency Shares (FXC) is likely where we’ll make a currency investment. The FXC has lost -13% of its value since the last week of October, and it also pays a 2.6% yield. Below is our chart and our levels.

BUY for a "Trade" = $82.10
SELL that "Trade" = $86.28

This is simply another way for us to express our investment idea that the US Federal Reserve will de-value the US$ again by cutting interest rates to negative (on a real basis). This will be inflationary, for a "Trade", and countries (Canada) levered to commodity price strength should benefit.

Eye On Trust: Korea, Don't Ask, Don't Tell...

Article in bloomberg on Korean companies blowing up because of toxic “hedging” products. Here is the line that caught my eye:

“Most Korean lenders bought the products from overseas banks then resold them to local companies, leaving them liable for their clients' losses in case of bankruptcy, says Hanwha's Mo. Banks haven't disclosed the identities of counterparties.”

Which Wall Street bank did these trades? I wonder… Koreans will likely think they were played for fools or worse.

Bloomberg article link:

Andrew Barber

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OIL: weekend thoughts from KM and DJ

Below are our collective thoughts, in response to some thoughtful client questions:
The immediate term “Trade” in Oil is up from where we bought it ($69). The intermediate “Trend” is as nasty as anything I see in macro right now. The challenge is to maintain those 2 opposing thoughts in your melon, and remain sober enough to make money.

There are two major “Trend” lines in Oil to keep on your screen, $93, then $114.

My summary point of DJ’s fundamental outlook on the “Trend” is simply that scarcities become surpluses during global recessions.

  • Here’s my simplistic take on oil, the demand side will continue to be weak in the U.S. and weaker than expected globally probably into the back half of 2009 (potentially much longer). This is obviously not unprecedented. From 1978 to 1983, Oil demand in the U.S. was down for 5 years in a row for an aggregate peak to trough decline of 19.1%. I’m not saying that will happen again, but there is a reasonable scenario where U.S. demand is weak for awhile and if you see U.S. demand drop by 19% over the next five years, China better be growing more than expected to sustain the price of oil.

  • On the production side, while I totally buy the long term supply constraint argument, in the short term and this is very simplistic, if OPEC has to cut production to maintain price than scarcity value should not be priced into Oil anymore (I think that was part of the argument that people were making when Oil was on its way to $140 i.e. there is a premium above marginal cost for scarcity), thus Oil should trend towards its marginal cost . . .$60/$65?
  • From a trading perspective, we have been watching Oil futures fairly closely and, as I’m sure you know, they are solidly in contango. Which means in the short term, it pays to store oil and we will likely see inventories building, which is a negative fundamental data point. In support of this, while the weekly IEA data doesn’t show inventories that are well above their historical average, days of supply is now close to 24 days versus 21 days a year ago (inventory is normal but supply is down 5%+ y-o-y), which suggests inventory will continue to build in the U.S. in the short term, which will lead to incrementally negative data points.
  • In terms of interest rates, our macro view is that the “Trend” will become higher, and perhaps dramatically, into 2009, which should strengthen the U.S. dollar and, obviously, act as a cap on the price of Oil into 2009 as well.

    From quant perspective, and I’ll let Keith weigh in, Oil is oversold, no doubt there, and there is a potential short term catalyst in the Fed cutting rates again, but even the Fed Rate must be at least partially priced in since the fed futures, last I looked, are close to fully discounting a 50 bps cut.
  • So, in summary, I have a hard time getting excited about Oil in the next 6 – 12+ months. KM likes it, but I can see him unloading it on price in 6-12 days! If that’s what it takes for us to keep outperforming in this market, so be it. Obviously the bearish “Trend” side of oil is no longer a contrarian view at this point, but facts are facts.
  • Daryl Jones
    Managing Director

SP500 Levels Into the Close...

We've been bouncing around a critical momentum line throughout the day. That line in the SPX is 955.98 (see chart). A close below it takes you to 875.66 on the downside. A close above that gets you another +8% to the upside to 1035.11.

That's our math, and we're sticking to it.

SONC – Management Not Conservative Enough

Just three and a half weeks ago, SONC issued its FY09 EPS expectations of up 12%-14%. Even in that short time period, management stated today on its earnings call that the landscape has changed rather dramatically. Although SONC did not change its guidance today, management said that current credit conditions could impact its franchise development target of 155-165 new openings, on which the 12%-14% EPS growth relies. SONC then went on to say that a lot of its franchisees are well capitalized. When asked specifically why they are not lowering their EPS guidance to a more cautious range based on the risk to the company’s development schedule, management said, “If we thought we should pull back, we would” so there appeared to be a lot of hedging on the part of management as it relates to current visibility.
  • Prior to today’s call, I thought SONC’s FY09 EPS expectations were aggressive, and although they still seem to be, I did not realize before today that half of this growth is expected to come from refranchising gains. So really only 6%-7% of SONC’s EPS growth relies on operations and those targeted 155-165 franchise drive-in openings. Instead, SONC’s ability to achieve 12%-14% EPS growth focuses largely on the timing of partner drive-in sales to franchisees. Despite management’s assurances that so far no transaction has been impacted by the current credit markets, this remains a real risk for the company.
  • I am also less than confident in SONC’s ability to return to flat partner drive-in same-store sales growth for FY09 following the 3.9% and 6.3% declines in 3Q08 and 4Q08, respectively. Although the company will be lapping easier comparisons in the back half of the year, if current trends continue into 1Q09 and 2Q09, SONC would need to generate 5%-plus numbers in 2H09, which would be a significant improvement from current trends. SONC’s partner drive-in’s average check has been hurt by the introduction of its Happy Hour promotion, which drives increased traffic at the expense of average check and margins. The company will be lapping this introduction in November so that should benefit numbers on a year-over-year basis.
  • SONC’s 1Q09 results should continue to be hurt by lagging sales results because although the company is seeing improved customer service scores, I don’t think SONC will see a quick turnaround in trends in this environment. Additionally, SONC expects its commodity cost to be up high single digits in the first quarter as it is currently experiencing beef prices (12% of SONC’s costs) up in the 30%-35% range.


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