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Exceptional Day

“The ignorant man marvels at the exceptional.”

-George D. Boardman

 

George Boardman was an accomplished American man from Maine. Graduating in 1822, he was Colby College’s first graduate. He had exceptional success as a global missionary.

 

Most of the people I know who accomplish great things in this good life don’t marvel at their accomplishments. They wake up every morning expecting it of themselves. They also expect adversity. In fact, most of them can’t live without it.

 

Yesterday was an Exceptional Day for Europe. I, for one, got royally squeezed in my European shorts by it. After going through the wringer on plenty of these centrally planned short squeezes since 2008, I’ve stopped marveling at them. This is what the Fiat Fools do. Whether it was TARP in 2008 or what you saw yesterday, short-term volatility only perpetuates the long-term problem.

 

Members of the European Keynesian Kingdom (EKK) emerged from their 3 hour lunch yesterday with a statement that Greece needed an “exceptional and unique solution.”

 

Then, they offered the bankrupt nation $229 BILLION in new aid (~75% of GDP!)…

 

Then, they spent the rest of the day gloating about their short-term political success…

 

That’s what professional politicians promising the arrest of gravity do.

 

Germany’s leader of Short-Termism, Angela Merkel, emerged from the meetings in Brussels proclaiming her mystery of faith saying: “I am satisfied with the outcome because the euro countries showed today that we are up to the challenge, we can take action.”

 

True, Mrs Merkel – for a day. But what shall you do tomorrow? Another European summit? How about next week? Any plans for August?

 

In all things risk management tomorrow starts today. Rather than marveling at your wins or loses, you’re job is to put on the trades today that will position you to not lose money tomorrow. Being awestruck by an exceptional market move can freeze you. Don’t let that happen. Out of sight, out of mind – onto the next.

 

My short-term performance problem in Europe yesterday aside, we had a great day on the long side of everything we’re long in US Equities. Covering my short position in the SP500 on July 5thhas allowed me to broaden my horizons and move to our most invested position in Global Macro for 2011 YTD (drawing down my Cash position to 43%).

 

What that doesn’t mean is that I should be marveling at those gains. Given our Q3 Macro Theme of “Risk Ranger”, I should be selling some of my gross long exposure in the US today and adding to my short exposures in Europe. The core tenant of the Risk Ranger theme is implied in the name – manage your risk within proactively predictable ranges of market prices.

 

So let’s do that – in Global Equities here are the intermediate-term TREND ranges we plan to use in Q3, until the plan changes:

  1. USA – SP500 range of 1
  2. CHINA – Shanghai Composite range of 2
  3. JAPAN – Nikkei range of 97
  4. INDIA – BSE Sensex range of 17611-19409
  5. GERMANY - DAX range of 7075-7451
  6. SPAIN - IBEX range of 95
  7. ITALY – MIB range of 179
  8. GREECE – ATG range of 1151-1346
  9. BRAZIL – Bovespa range of 589
  10. CANADA – TSE range of 12811-13765

That’s it. There’s nothing exceptional about today or how we are going to manage risk around it. We have our intermediate-term strategy and, as we whip around both the US Debt Ceiling debate and European Sovereign Debt Crisis, we’re sticking to it. As you can see, not 1 of the top-side’s in our intermediate-term TREND ranges was violated to the upside yesterday.

 

My immediate-term TRADE ranges (different duration than the TREND) for Gold (we’re long, and we bought Silver yesterday too), Oil (no position), and the SP500 (no position) are now $1, $97.21-99.76, and 1, respectively.

 

Enjoy the storytelling of the Fiat Fools and, of course, an exceptional weekend,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Exceptional Day - Chart of the Day

 

Exceptional Day - Virtual Portfolio




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BJRI: STRONG QUARTER BUT PRICED TO PERFECTION

BJ’s posted in line results but, at this multiple, the BJRI growth model is priced to perfection.

 

BJRI comps beat consensus at +6.9% versus +5.3%.  In our preview note we had highlighted the sequential strength of California Sales Tax Receipts and strong intra-quarter to date Knapp Track trends as supportive of BJRI posting a strong comp this quarter.  Costs were effectively managed during the quarter thanks largely to strong same-store sales growth.

 

In terms of outlook, the company is lapping more difficult compares in the back half of the year from a comp perspective.  In addition, the amount of price that the company is currently planning on taking through the third and fourth quarters is 2% versus the 3% plus during the first half of the year.  Importantly, 80% of the company’s food costs are locked and COGS as a percentage of sales are expected to be 25%, roughly, for the remainder of 2011.

 

In terms of new unit openings, the company is opening as many as four new restaurants in Q3, one of which is open already in Texas.  Additionally three to four openings are anticipated in Q4.   Restaurant opening costs are expected to be $500k per unit.  The company remains focused on growth, rather than dividends or any other use of cash.

 

The company faces a much tougher compare in the third quarter from both a same-restaurant sales and margin perspective.  At 17x EV/EBITDA, expectations are high.

 

BJRI: STRONG QUARTER BUT PRICED TO PERFECTION - BJRI pod 1

 

BJRI: STRONG QUARTER BUT PRICED TO PERFECTION - bjri quad

 

 

Howard Penney

Managing Director

 

 

Rory Green

Analyst


RT - STALE BREAD

I am using the metaphor of stale bread in honor of the new bread program that the company rolled early last year, which is also part of the current financial stress on the company.  It’s also a way of saying that this stock is done for a while. 

 

In not going to rehash the whole quarter, but instead highlight the issues that need to be fixed before the financial performance can be turned around.

  • Management is in denial that Chili’s and Applebee’s are hurting Ruby’s, but I agree it’s not all the economy.  I will concede that consumer confidence is down and middle income consumer is hurting.
  • Big picture strategy is confusing.
  • On one hand they are diversifying away from Ruby’s and yet they are buying over leveraged Ruby’s franchisees.
  • Because of the acquisition binge, leverage is a problem again.  There is now only a 70bps cushion on the debt covenants.  Didn’t management learn anything from when the stock was trading at $1 in 2008 and 2009?
  • Limited operational flexibility due to increased leverage.
  • Increased leverage at a time when the company’s capital needs are growing (i.e. debt pay down/incremental growth capital is needed).
  • Share repurchase? Given the leverage and the fact that they want to convert Ruby Tuesdays into other concepts, how are they going to buy back stock?
  • The Ruby’s Tuesday brand is a regional competitor competing against two strong national brands that have sales momentum.
  • The wild card going into this quarter was the potential for more shareholder activism.  I’m sure the new board members were not happy to see the newly leverage balance sheet!
  • My advice is to stay far away from this one for the time being.

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Framework of Greek Bailout Part II: Skepticism Abounds

Below we provide the main notes from tonight’s press release of EU Heads of State or Governments of the Eurozone and EU Institutions, including a Q&A, on the terms of Greece’s second bailout package.  To say the least, we’re extremely skeptical of the program providing anything more than another near term band-aid to European sovereign debt contagion. Perhaps the group’s insistence that Greece (and not the other PIIGS) requires an “exceptional and unique solution” was most concerning of all.

 

Notables:

  • €109 billion of financing for Greece from the EU and IMF and an estimated €37 Billion contribution through VOLUNTARY Private Sector Involvement (PSI) of banks to reduce Greece’s debt through exchanging existing bonds for new bonds with lower interest rates and longer maturities. (unique terms to be drafted)
  • The European Financial Stability Facility (EFSF) is the vehicle for the disbursement of the new €109 billion package
  • On future EFSF loans to Greece, the maturities of the loans will be extended from the current 7.5 years (to date Ireland and Portugal are the only countries using the facility w/ these terms) to a minimum of 15 years, and maximum of 30 years with a 10 year “grace” period. [IMF also said Portugal and Ireland will be extended these terms]
  • EFSF interest rate terms will be reduced to 3.5% from 5-6% level, extended to existing and future loans to Greece, Ireland, and Portugal
  • The EFSF can intervene in secondary markets to buy up sovereign bonds (officially), whenever deemed necessary 

Other Remarks:

  • Public deficits in all EU countries will be brought below 3% (of GDP) by 2013 at the latest
  • Extension of a “European Marshall Plan” in which countries can give money (no explicit terms provided) to Greece to drive economic growth
  • Reliance on credit rating agencies should be reduced
  • Q&A Call-Out: Trichet insisted that Greece is not in selective default. When again questioned that the PSI is tantamount to a default through restructuring, as technically defined by the credit agencies, Trichet replied that today’s package shouldn’t trigger a credit event (default) with credit agencies (Throat clear).

Got Risk Management?

 

Matthew Hedrick

Analyst


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