Schwarzenegger: "We'll Be Out Of Cash By February"

No, that's not good! That's "we" as in the Golden State of California...

If that's not the most bearish headline of the day, I don't know what is.

Cost of long term capital will continue to increase as access to cash continues to tighten.
Be careful out there,

WRC: A Balloon Can’t Stay Underwater Forever

This was perhaps the earliest (and often most painful) call of my career. But you can only hold a balloon underwater for so long. WRC is finally being exposed for what it is. A massive over-earner.
A colleague shot me an email this morning saying “Warnaco finally pulled a Warnaco!” How true. I’m not going to waste your time or mine giving the run-down of what they said on the call, or what happened. The bottom line is that this has largely been a FX-induced margin story as the company printed too much FX benefit, and understated the impact to the Street. Check any of my past posts for the math. I won’t bore you with it now.

So what’s in the stock now? That a 10% margin is not sustainable after all without FX tailwind. 7% is closer to reality. But what happens if a new Obama Administration takes up rates in '09 and the dollar along with it? Then FX turns into a headwind, and there is no reason margins cannot go back to the low/mid single digit range. That’s when cash flow gets to a point where we need to start to look at debt covenants again.

There will come a time to buy this stock. But even with a 30% hit from yesterday – and 2/3 off its 1-year high, we’re not there yet.

The Consumer Needs Prozac

Not a shocker that spending continues to decelerate across the board. What happens in Nov/Dec when unemployment is 1% higher vs. year-ago, and we comp a negative ’07 personal savings rate?

I didn’t see much in this morning’s sales numbers that change my prevailing view on the consumer. In fact, fundamentally I have to admit that the yy decline at many retailers is accelerating faster than even I’d have thought – and per my Oct 12 Consumer Spending Analysis, I think we’ll see a $170bn decline in consumer spending in 2009. A few points…

While we can hardly call what we’re seeing today a blanket positive stock reaction with 1 only in 5 retailers on my screen up for the day – it is interesting to note that the positive moves are largely in larger liquid names like JCP, KSS, M, JWN, COST that posted horrible numbers.

Let’s try to ex-out all the Oct noise for a minute. Every sector of retail that reported comps showed a sequential decline in trends on a 1, 2 and 3-year run rate by an average of 200-300bp. Sure, there is share shift within each segment and each company. Both the overriding trend is big.

What’s next? A massive question mark. November of last year was big across the board. When adjusting for calendar shifts and looking at Nov and Dec together, we’re still looking at 2% trend-line spending heading into holiday ’07. On the plus side, gas prices are lower than the year-ago period. But unfortunately, it does not come close to the magnitude needed to offset 1% higher unemployment, and the fact that during holiday ’07 the personal savings rate went below zero to help fuel spending that shouldn’t have happened. That’s not repeatable.

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S&P500 Levels: Refreshed For 11:00AM

The quantitative setup for the US market has returned to negative, but the range is tighter and the next low is likely going to be higher. I mentioned this in the prior TED Spread post - here are our S&P500 levels associated with that immediate term "Trade" call:

Sell "Trade" = 967.86
Buy "Trade" = 862.72

This market is to be traded, aggressively, with an appropriate amount of powder saved for down days.

The Light, In A Darkened Tunnel: The TED Spread

Amidst a major quantitative breakdown of multiple factors across my global macro model, one shining light of positivity remains - the dampening of global counterparty risk.

3 month LIBOR minus 3 month US Treasuries (TED Spread) has come down appreciably since the week of October the 13th (see chart). This is the PRIMARY reason that I think this current selloff in global equities will be met with higher lows than those freak-out ones that we saw last month.

Casual Dining – Ugly is as Ugly gets

Yesterday we posted a bleak Macro view of the consumer. What we left out was the impact of the October stock market crash on spending.

As you can see from the commentary below the trends in 4Q08 are very bad. Complicating the bad consumer environment is management missteps. (1) MRT was still buying back stock in 3Q08 and is planning on adding capacity in 2009. (2) MSSR also plans to add 5-6 units next year. (3) Poor RUTH, they are just trying to stay alive. There is no reason to own RUTH, MRT or MSSR.

You can throw a dart at a dart board to find a good short in this group, but to me LNY, DIN, RRGB, CPKI and PFCB stand out.
RUTH – Madison Dearborn to the rescue, but still on the Bankruptcy watch list

RUTH is on our short list of Bankruptcy candidate, but it should be noted that a very larger shareholder has capital and access to those that have capital.

In 3Q08, RUTH’s same-store sales decreased 6.9%. The average check fell 1.5%, driven by menu mix shift and year-over-year pricing of approximately 2% - RUTH saw a 5.2% reduction in traffic. Same store sales in 3Q07 declined 0.4%.

This is where its gets really ugly - October comps at Ruth's Chris declined approximately 15%. On the call the company said “If we assume company operated, comparable restaurant sales at the Ruth's Chris Steakhouse decreased 15% for the entire 13 week period, we would expect earnings per share between zero and $0.02 (street at 0.17) for the fourth quarter and between $0.33 and $0.35 for all of 2008 (from prior guidance of $0.55-$0.60).

MSSR – Management does not get it

More of the same…. October same store sales were horrible and they are still growing too fast
MSSR reported 3Q08 EPS of $0.09 vs. street at $0.11. Same-store sales declined -5.5%, with traffic declining -9.8%.

On the conference call the company said that October same-store sales declined approximately 10%. Management offered that if same-store sales trends do not change for the balance of 4Q, 4Q EPS would be $0.15-$0.20 (street at $0.29), and for every 1% change in quarterly same-store sales, there is a $0.02-0.03 impact to earnings.

MSSR is a classic case of watch what I do not what I say! Management provides the customary balance sheet commentary; “Given the recent credit market crisis, we have focused on maintaining maximum financial flexibility and ensuring that our balance sheet remains financially sound, including managing our debt level and limiting our new unit development for next year.”
But in the next breath MSSR’s management says we still plan on opening 5-6 new units in FY09 (a slowdown from FY08’s 11 units). WHY?

MRT – In a very difficult position

Morton's Steakhouses 3Q08 same-store sales declined 7.6%. This includes the benefit of a pricing impact of approximately 3.5% in the quarter. The balance of the change was driven by menu mix and decreasing guest traffic. This compares to strong comparable restaurant revenues of +7.3% in 3Q07. MRT commented that same-store sales for the month of October declined 15%.

The Company currently expects 4Q08 revenues to range between $98 million and $100 million, which reflect a 9% to 11% same-store sales decline.

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