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RUTH – Desperate Times

I commented back in September when RUTH announced its sales-leaseback transaction that the banks appeared to be driving the process at the company. At the time, management stated that it had pursued the transaction to increase free cash flow and “ensure maximum operating flexibility.” I argued the transaction achieved the exact opposite and that owning real estate and not paying rent actually provides more flexibility. Instead, I think the company was motivated to do the sales-leaseback by Wells Fargo which wanted RUTH to use the cash proceeds to reduce its outstanding debt balance.

Yesterday, RUTH announced that it has completed additional cost reduction initiatives, including a cut in the number of corporate personnel. The company estimates that these cost reductions will generate annualized savings of approximately $2-$4 million on top of the previously announced annual expense efforts of about $8 million, resulting in about $3-$4 million of savings in 2008 and $10-$12 million in 2009.
Again, management stated in its press release that these cost reductions were completed in order “to maximize free cash flow and manage the business to preserve [its] flexibility.” The press release went on to say that “these changes are necessary in order for our organization to maintain stability in the current operating environment” and that “these actions were also taken in an effort to rationalize the company’s infrastructure from one intended to support material new unit growth, to one with a significantly reduced development outlook.”

I would agree that these recent moves to eliminate costs will provide the company with more flexibility, but again, like the sales-leaseback transaction, I think the need to implement these cost savings initiatives points to RUTH’s current desperation. The company is doing anything it can to survive in the current environment. Making matters worse for RUTH, although not surprising relative to recent comments from other casual dining operators, the company also stated that the challenging trends through 3Q08 deteriorated further in October. RUTH’s comment about its significantly reduced development outlook, however, highlights a definite step in the right direction…better late than never.

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.
KM

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.
KM

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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!
KM

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…

THE PRICE OF LIQUIDITY

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

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