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EYE ON COFFEE

Traders love coffee. Lloyd’s coffee house was a gathering place for speculators in shipping insurance and commodities in 18th century London that turned into Lloyd’s of London (the saloon across the street, Jonathan’s, became the London Stock Exchange –traders also love alcohol).

A data point on coffee this morning had traders taking note: the National Federation of Coffee Growers of Columbia is predicting a cyclical decline in Brazilian Coffee production will cause a global deficit as supply falls below demand that has grown dramatically in recent years.

  • To put in context, the grade of coffee produced in South America is the premium Arabica grade. Starbucks and other retailers have re-introduced premium South American blends to new audiences from the less urban parts of the US to developing Asian and Eastern European markets in recent years and Columbian Growers are betting that despite slowing growth one of the last sacrifices that people in those markets will make is their premium coffee in the morning.
  • Coffee Futures felt the same pressure as other softs in recent months as the great deleveraging process saw a tremendous amount of capital flow away from static log index investments which were based on rolling front month positions. Unlike Oil or Gold, Coffee does not enjoy the same following among institutional investors as a standalone investment and so the absence of index investors will significantly impact open interest and Volume. JO is an Ipath ETN based on the Dow Jones AIG Coffee sub index –which consists solely of front month NYMEX Coffee Futures on premium South American Arabica.
  • Andrew Barber
    Director

Chinese GDP Outlook: Are We Bullish Enough?

We continue to exhaust the bears with our new found bullishness on China. It would be hard to be as bearish as we were on Asia 9 months ago, so it's rather amusing to get this kind of feedback. Trust me, we get the bear case – we used to annoy everyone with it!

Below is a 3 year chart of Chinese GDP. Notice the seasonal pickup in the January period for each of the last 2 years. It could very well happen again. Anything can...

We wrote this morning that we see a Chinese recovery in 6-9 months. We question all of our positions, all day, every day... the question on this seasonality point is, are we bullish enough?

KM

MCD –TRENDS ARE SLOWING

There are a number of reasons to believe that MCD’s domestic business is slowing. First, a recent franchise survey estimates that MCD’s U.S. September same-store sales have slowed to 3.1% from August’s 4.5% number. According to the survey, the October number slowed even further. On a 2-year basis, this slowdown is even more apparent with 2-year average trends falling to 3.3% in September from 6.0% in August.

  • Second, the most recent data from WMT signaled that its sales trends have slowed. We have not heard from MCD since WMT reported its sales for September.
  • Third, we have posted in the past that MCD is getting more aggressive with coupons, which is another sign that MCD is struggling to generate traffic trends!

  • Fourth, we recently posted some data on industry discounting (please refer to my October 18 post titled “Deal or No Deal”). The data pointed to a significant increase in discounting. The combination of slowing sales trends and increased discounting will lead to lower levels of profitability.

  • Fifth, nobody is immune!

  • There are a number of reasons to be bullish on MCD, but I’m not in that camp. I have posted about franchise anxiety, which is at levels we have not seen in years. The currency benefit the company has enjoyed for the past years slowed significantly in 3Q08 and will be a drag to EPS in 4Q08. The bulls point to the new coffee program as being the savior for top line sales over the next 18-months. I believe that there are clear signs that MCD will need to adjust expectations down for that program as we enter 2009.

    One of the biggest issues for the stock is that the street is hiding in MCD as a “safe haven.”



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DON’T WORRY HELP IS ON THE WAY

Sorry but I’m just not comforted by the United Nations announcement that its tourism arm is creating a Resilience Committee to combat the travel downturn. If you think the UN will be productive in this arena, buy Las Vegas. I’m not.

This is the same group that was very publicly positive on global tourism as recently as April. At the same time my partner, Keith McCullough was taking the exact opposite macro view.


THE UPSIDE OF THE CREDIT CRUNCH

We continue to believe that MPEL’s City of Dreams will be the only new casino/hotel to open in 2009. The LVS construction delay on Lots 5 and 6 that came to light this weekend certainly bolster our case. While Galaxy Entertainment hasn’t announced any pushback on the planned 2009 opening of its Cotai Megaresort, I believe that is forthcoming. There is nothing like a trip to Macau to get the full picture. Having guys permanently stationed on the ground there doesn’t hurt either.

Macau supply growth is slowing down. That is good for Macau operators. Despite its inability to pull in the financing, this is good news for LVS as well. They still have their covenant issues in Q4 but one step at a time. WYNN looks to be in the driver seat here. All we need is for Beijing to loosen the reins in visitation and/or the Macau government to tighten the reins on junket commissions. Following my trip to Macau, I believe both will happen.

Two 900 lb Gorillas Drop the Gloves

There’s yet another patent infringement suit on the tape. This one is Nike and Wal*Mart – and predicting the outcome is a slam dunk.

Nike is suing Wal*Mart for patent infringement as it relates to its Shox design. So many of these cases are in the gray area that could really go either way – but this one is a no brainer. Check out the image below. The interesting thought here is whether or not Nike brought this upon itself when it bought Starter and took the product to Wal*Mart at reduced price points on shared Nike designs. One could argue that perhaps Nike gave Wal*Mart a taste of improved profit offering before it pulled the plug, and WMT wants to keep the torch lit. You can just as easily argue that WMT attempted to stick it to Nike by selling replicas of Nike Shox at $13 – an 80% price cut from the real McCoy. Either way, the McCoy is, in fact, real.

Nike will probably end up netting $50-$100mm in a settlement out of this one (similar to recent Adidas and Payless precedents), but more importantly it will have its designs yanked out of WMT

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