Japan's "We Don't Get Capitalism" Chart...

We wrote about Japan's decision to cut rates from zero to zero again this morning (from 0.5% to 0.3%). This was nothing but a polarized and politicized event. Inflation was also reported in Japan overnight at +2.3% year over year growth. When your economy is experiencing chronic stagnation, and mounting stagflation, the last thing you should do is cut rates further.

Paul Volcker will do a teach in to the world on this score, once Obama takes office... I hope. This chart is getting painful to look at.

TED is a "Cowboy Capitalist"

Here are 2 pics of the 2 most important things that have occurred on the margin in the last few weeks. 1. the narrowing of the TED spread, and 2. our getting bullish for the 1st time in well over a year.

Could Obama Signal A Bottom In Confidence?

We have been grinding through all time lows of negativity across sentiment and confidence readings this week. This morning, we just got the most current reading on US consumer confidence from the October University of Michigan report - guess what? It stopped going down!!

Why is that? How can the most current U of M reading of 57.6 and the weekly ABC/Washington Post reading of -49 be a touch better than those of the last few weeks? Aren't all of the talking heads warning Americans of the Great Depression Part Deux?

Maybe the answer is Obama. Over 80% of the people living in this country don't think the country is headed in the right direction. Change is good. Why? Because it’s what happens on the margin that matters most.

Expectations from more than half of those who vote next week (assuming Obama wins, making that math > 50%) is that the USA is in a better place next week. In our macro models, “better than bad” is still good.

This is just one more bullish signal to add to my growing list... Cowboy up!

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Coffee trends – JO/SBUX looking better

Yesterday, Howard Schultz had some positive comments on sales trends so far in the first quarter. On the November 10th earnings call, the commodity commentary coming from the company will also be a net positive. Both coffee and milk are working in the company’s favor…


I’m not sure this massive gaming short squeeze is over. As we predicted and discussed in our 10/29/08 post “A SHORT SQUEEZE COMMETH”, there is a heavy short interest in the space to work through and some near term positive catalysts. However, when the dust settles, investors will be left with a choice: Those companies that proactively managed their balance sheets and liquidity and those that were forced to react. We put PENN, BYD, and WYNN in the former category and ASCA, LVS, and MGM in the latter.

Yesterday, MGM announced a $750 million senior note deal priced to yield 15%. The proceeds will likely go immediately to pay off some of the company’s 4-5% credit facility. That is an ugly, but apparently necessary spread that will cost the company about $0.15 in annual EPS or 11% of 2009 estimated EPS.

The contrast is striking. It’s entirely fitting that MGM closed this deal the same day PENN received the final $775m payment from Fortress of the total $1.45bn owed. PENN now sits at 2.5x leverage with huge liquidity while MGM is levered at 6x. It’s also the same day that WYNN released earnings and provided an in depth discussion of its massive liquidity including $1.7bn of cash on hand.

The end of the easy money is indeed over and those companies that egregiously exploited the environment to borrow at unsustainable rates and invest in low ROI projects are now paying the price. Over-earning is a theme that we’ve hit on for some time and we are now getting a clearer picture of the true earnings power of these companies.
I personally own shares of PENN

DIN – Where there is smoke there is fire

I have heard from a very strong source that the Applebee’s franchisees are restless. Apparently, the franchisees have formed and capitalized a new group – The Franchise Business council. To be clear this is different from the Franchise advisory council which has been in place for years.

The new Franchise Business council has been formed to help set the proper direction for the company. Essentially, the Applebee’s franchisees are very unhappy with the company’s strategies. They are choking on the bottom feeder, all-you can eat promotions that are being set by the home office.

I believe the franchisee uneasiness stems from when the current CEO of DIN, Julia Stewart, was president of Applebee’s - from October 1998 to August 2001. Her departure from the company was controversial at the time so it’s not completely surprising that the franchise community is restless over the current direction of the company. Unfortunately, there is not much they can do.

The only thing I see them doing is working with the largest shareholders to force a coup d’état…… The top four shareholders control 62% of this company. With the stock trading at $16, the market believes that the company’s liquidity fears are now over. I think not. Management pulled a rabbit out of the hat in Q3 by announcing its asset purchase agreements for the sale of 66 stores. From where I sit, these sales only raise more questions and did not solve the liquidity issues. As the stock heads back down to $6 confidence in management will wane.

I’m sure we will be reading about this in the WSJ before long.

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