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US Consumer Confidence: Here comes Jimmy!

This morning's University of Michigan consumer confidence report gives us the most current reading on November... like Jimmy Braddock, the US consumer is coming back from the cold mat. The report improved, barely, but the point is that it improved to 57.9.

Consumer confidence in the USA bottomed in early October of 2008. Until I see a fact to support otherwise, that's one more reason why the October lows in the S&P500 can hold.

Everything that matters in our macro model happens on the margin. On the margin, this report registers a winning round for the bull who believes in Jimmy and that the this narrative fallacy of an 09’ Great Depression won’t keep him down and out.

Casual Dining – October Traffic Trends

Casual dining same-store sales declined 6.1% versus down 1.1% a year ago. This represents a 230 bp sequential decline from September’s number. Most of this decline was driven by the continued fall off in traffic, which accelerated its declines in October, down 8.2%.


Market shares were remarkably consistent in October versus the previous few months. In terms of rolling chip (RC) volume, the only big movers were Crown (MPEL) and SJM. Crown continued its decline, dropping to around 12% from 14% in September, and well off its high of 20% in April. SJM was the main beneficiary of Crown’s woes. The other companies maintained September’s market share. MGM seems to have found its way in the RC business in maintaining its all-time high market share of 7% achieved in September.

Turning to mass market (MM) revenue, Wynn Macau lost a little market share to MGM, Crown, and SJM. It is unclear whether hold percentage played a role. Wynn Macau’s total Baccarat revenue share (MM and RC combined) declined to 17% in October from it 2008 high of 19% in September. Wynn held very high in September relative to the market. October was consistent with the YTD average of 17%. LVS’s MM market share remain consistent with the past few months although total Baccarat market share dropped sequentially from 28% to 25%. Similar to Wynn, September’s share was boosted by a low RC hold percentage for the market relative to LVS. The opening of the Four Seasons in August has kept market share at 25% or higher the last few months.

Overall, I think October was a fairly uneventful in terms of market share shifts. Visa restrictions continue to have an impact on the overall market but recent share trends seem to be holding.


Keith - BKC - short with impunity anywhere close to 24

Howard – BKC - The industry is still a zero sum game - WEN new value promotion is driving incremental traffic and MCD dollar menu is winning too. BKC’s trends suggest they are losing markets share in the US.

Keith - GMCR - short with impunity anywhere north of $33

Howard – GMCR - I don’t buy into the new coffee revolution and the P&L looks fragile…..

Keith - EAT buy at 7.08

Howard – EAT - Down 27% over the past 30 days! Of the 45 names that Malcolm Knapp tracks only one concept had sales trends better than Chili’s in the month of October.

Keith - MCD - short at 58.26, the monopoly game is ending here.

Howard – MCD - My concern is more about 2009. The MCD coffee program is challenged and looks like it will not provide the lift the company needs to drive incremental traffic in 2009. The reallocation of advertising money toward coffee will slow overall trends.

Keith - SBUX - I buy at 8.48; very negative divergence today

Howard – SBUX - It will take time to repair the damage done to this stock. One of the biggest negatives facing SBUX is that senior management is out of touch with the investment community.

Keith - DIN's big resistance line is 17.34

Howard – DIN - Yesterday DIN traded in a 30% range! In the early part of the 4th quarter nearly every casual dining stock has gotten crushed, but not DIN. Over the past month DIN is up 97%, while DRI is down 10% and EAT is down 27%. Of those three names only DIN has severe balance sheet issues! This market is insane!

Pop... Pop... Bang!

“I have to believe that when things are bad I can change them.”
-Jimmy Braddock (Cinderella Man, 2005)

Since all of the Street’s new consensus savants are all “beared-up” and ranting about Great Depressions and all, what better inspirational metaphor to hit you with this morning than Ron Howard’s 2005 film, Cinderella Man.

The story of Jimmy Braddock is one that I have alluded to before. “Pop… Pop… Bang!”, remember? That’s the combo Braddock would hit you with right in the gut, right when you thought you had him down for the count. Sound familiar?

How about yesterday’s rally off the mat… right when the people who might love to see me lose felt best, at say 1PM EST on November the 13th… “Pop… Pop… Bang!”… Our market call to close at higher lows came right back with a flurry to the kidneys… “Pop… Pop… Bang!” and the short squeeze was on (“Beware Of The Squeeze”, www.researchedgellc.com 11/12/08)… the invincible bears were dizzied, and finally the market rang the bell for an +11% intraday market move. What a great fight!

Beaten down by a real Depression, Braddock fought with a broken hand just to feed his family. In the end, he defeated the “Investment Banking Inc.” champ of his day, Max Baer, and became the heavyweight champion of the world. One of my favorite interchanges between legacy thought (Max Baer) and Braddock was the simplest: Baer – “It’s no joke, pal… people die in fairy tales all the time.” Braddock replied – “I have to believe that when things are bad, I can change them.” Amen, Jimmy. Amen.

“Cinderella Man” is a true story, and so is ours. When we’re wrong, we take our lumps, go back to our corner and re-focus. When we are right, the hitting you feel from my keystrokes feels real, because it is. “Pop… Pop… Bang!” Do I like winning? I live for it… Do I hate losing? With a passion… I am not doing this for handouts, and I am certainly not the kind of man that will take a knee to someone who has more money than me. I am in it to win it, and I am not going away.

So let’s roll up our sleeves and get back at it this morning. Are things bad in this global economy of interconnected macro factors? You bet. The number one headline on Bloomberg this morning is “Europe falls into a recession for the first time in 15 years.” Gee, thanks. Consensus can result in both a solid right or a bloody nose – keep your head up and eyes on the opponent – this is a full contact sport. On the heels of Spain, Italy, Hungary, etc reporting recessionary GDP reports this morning, the revisionist scorekeepers are seeing European markets trade up +2-4% across the board. Stock markets are leading indicators, not fans in the cheap seats.

In Asia, China continues to strengthen its bid for the new heavy weight title of the world’s “New Reality.” Are some of the short selling savants still short China? Thank God, yes. The Chinese etf that we are long (FXI) had a +15% up day yesterday, and it literally dizzied the dudes on CNBC’s “Fast Money.” There is no better way to characterize their explanation for this week’s rally in China other than hilarious. These cats don’t have a process – that we know. But man oh man is it funny to hear these traders get all amped up and “fundamental” – they remind me of Don King.

Instead of listening to what one of the crackberry “Fast Money” dudes was telling you to use as a “China signal” (something about store checking Chinese imports at Wal-Mart?), stay in the home team’s corner here at Research Edge, and just read our daily notes. Our RE Macro clients have been getting inundated with portal postings for the last 6 weeks as we have been stepping into the ring and getting the analytical job done. We have an office in Macau don’t forget – we have edge. China is cutting taxes, spending stimulus, and seeing inflation drop in unison. “Pop… Pop…Bang!”… China’s stock market closed up another +3.1% overnight, making it 3 days in a row of gains, and ringing the bell for a +13.2% week. I said it yesterday, and I will say it again, CHINA’s STOCK MARKET IS BREAKING OUT.

Back to the ring here in the USA… the best news of this morning is that earnings season is ending. Amidst the flurry of sell side firms cutting numbers in Wal-Mart and Intel yesterday, both stocks closed the gap on intraday losses and closed up on their highs. If you sold them short on the news, shame on you. If I would have been wrong yesterday, I would have easily said shame on me.

There is no shame in fighting to feed your family. There certainly is no shame in any athlete I know celebrating victory. There is no Great Depression in this country. There is as much Irish-American pride in this country in a Jimmy Braddock as there is African-American pride in Barack Obama. Winning is what Americans love. Let that be the calling card for “The New Reality” – it has always been there. You just need someone to remind you from time to time that no matter where you go, there it is – “Pop… Pop… Bang!”

Have a great weekend,

Long ETFs

EWA –iShares Australia- Australian dollar set for a down week against USD & JPY. Babcock & Brown is in negotiations with creditors to buy time to liquidate assets, avoid bankruptcy.

EWG – iShares Germany - The Eurozone fell into its first recession in 15-years during Q3. German savings banks have agreed on a proposal to merge the state controlled Landesbanken into three new units which will now face tighter risk controls.

FXI –iShares China - The central government confirmed that it will lay out over 25% of the stimulus packages directly. This increased spending and the impact of tax cuts and higher export rebates will lead to a wider budget deficit in 2009 and more sales of government bonds.

EWH –iShares Hong Kong – Hong Kong's economy entered its first recession since 2003 with GDP down 0.5% for Q3 according to latest data, the government has lowered its full-year growth forecast.

VYM – Vanguard High Dividend Yield ETF – The largest holding in the VYM, GE, reassured investors midday yesterday that it plans to maintain its dividend through 2009.

EWL –iShares Switzerland- Data released in Switzerland yesterday saw the November ZEW expectations index improve marginally to -88.5 while October producer and import prices rose 2.9% y-o-y and were off 0.6% m-o-m.

Short ETFs

UUP – U.S. Dollar Index – In early trading this morning, the U.S. dollar is down versus the yen, but stronger versus the euro and British pound.

EWW – iShares Mexico – During a budget hearing Finance Minister Agustin Carstens announced that the government controlled Petroleos Mexicanos (PEMEX) hedged oil for 2009 at $70 per barrel to protect fiscal revenues .

EWJ – iShares Japan - Mitsui O.S.K. Lines, Japan's largest shipping line, will retire some of its fleet vessels including 7 capesize, for the first time in over two decades.

FXY – CurrencyShares Japanese Yen Trust – The yen continued its decline versus the USD, AUS and other major currencies rise on carry trade unwinds.

EWU – iShares United Kingdom – U.K. stocks rallied, led by energy producers, on bargain buying in the commodity sector.

Keith R. McCullough
CEO & Chief Investment Officer


Macau gaming revenues dropped an estimated 7% year over year in October, distorted lower by a high hold percentage last year on rolling chip (RC) play. Using the same hold % as last year, revenue would’ve fallen only 3%. Of course, MGM wasn’t open last year so the market is clearly challenged from a same store sales perspective.

Total RC volume looked to be down about 4% YoY, down from +3% growth in September. Crown’s growth rate continues to deteriorate. AMA flooded the market with credit earlier this year but has pulled back considerably as of late. YoY volume grew 50% in October, down from 140% in September. The other properties have been fairly consistent. Wynn Macau continues to generate around 50% volume growth, due in part to the expansion. LVS, Galaxy, and SJM are decidedly negative in that order.

On the high margin mass market side, revenue actually increased about 2% in October but not quite as strong as the 5% generated in September. Crown had a big step up here but still couldn’t move into positive territory. Wynn continues to drive positive growth that actually accelerated from September. Despite strong growth at The Venetian and the opening of The Four Seasons, LVS’s mass market revenue declined about 4%.

Overall, Wynn and Crown were the only two companies to generate positive growth in total Baccarat revenue. Wynn had a pretty good month, up 8% despite a lower than normal RC hold in October. LVS saw its Macau Baccarat revenues fall about 4% as a much higher hold % (but still normal) was offset by a significant decline in RC play.

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