Commodities – Milk prices

According to the cattle network, milk prices are trending much lower than a year ago due to lower cheese, dry whey and nonfat dry milk prices. The October Class III price was $17.06 and will decline in November to around $15.55, nearly $3.70 lower than a year ago. The Class IV price was $13.62 for October and will be around $13.50 for November, about $6.90 lower than a year ago. Milk prices are not expected to improve and could go even lower in the first half of 2009.


Stealing market share can take you only so far. We expect North American slot sales to fall around 50% in the first half of calendar 2009. Yet, the sell side currently projects WMS to grow its revenue 9% year over year in 1H CY2009 (2H FY2009). That would be quite a heist, especially now that the gorilla that is IGT is beginning to flex its muscles. IGT will likely be using its balance sheet more aggressively in the financing area to “buy” some business. Wait until they flex on pricing.
  • From our posts over the past few days it is pretty clear we don’t think WMS will make the Street numbers for 1H CY2009. The December quarter looks very good for the company and we actually expect upside to consensus. As part of their FQ2 release, however, WMS will have to address guidance for the remainder of its fiscal year and we don’t think it will be pretty.
  • So what does this do to the stock? This isn’t like a casino operator lowering guidance, AGAIN. WMS has raised or affirmed annual guidance for 10 straight quarters including raising guidance in 4 of those quarters. That is quite a track record and management deserves kudos. However, this consistency has set the stage for a major disappointment. WMS could become a victim of its own success.
  • The analysts love the stock. Indeed, 13 out of 15 ratings are buy. Downgrades are more likely than upgrades. Yes, the stock is down 45% on the year which, on the surface, appears to be washed out, until you compare it to the sector. IGT and BYI are down 82% and 70%, respectively. The gaming operators are down even more.

    The more they are loved, the farther they can fall.

With such an impressive track record comes high expectations
Analyst groupthink

Eye on Regionalism: France

French President Nicolas Sarkozy announced today that France will pay out €20 billion to protect its “strategic companies” in the wake of the global financial crisis through the creation of the country’s first sovereign fund. Made up of government and private investment, with state ownership projected between 34-49%, the fund will provide the catalyst for Mr. Sarkozy’s plan, announced last month, of protecting French companies from “foreign predators”.

Yesterday before an aerospace supply manufacturing company near Paris Sarkozy said:
“The day we don’t build trains, aeroplanes, automobiles and ships, what is left of the French economy? Memories. I will not make France a tourist reserve… I want France to keep its factories. I want this process of factory relocation and outsourcing to stop and I want firms with the potential to develop to be able to do so, even if financial institutions at the moment are a little timid.”

Theodore Roosevelt once said, “Speak softly and carry a big stick; you will go far”, which became his trademark foreign policy style. Ironically, Sarkozy, who took over the EU’s six-month rotating presidency in July 2008, has proven since his inauguration in May 2007 to define himself on an internationally stage as the converse: with bouts of grandiose rhetoric and de minimis policy measures. On Friday, on a podium with Dmitri Medvedev, Le Sarko stuck his foot in his mouth, saying the Americans’ (and Czechs’ and Poles’) plan to install an anti-missile shield against Iranian nukes would bring nothing to European security.” Further, Sarkozy proved to be a poor mediator in negotiating the withdrawal of Russian troops from Georgia. Sarkozy—who has received such nicknames as Super-Sarko, Sarko L’Americain, and President Bling Bling—has been nearly as heavily covered for his private life (e.g. his high-profile new wife Carla Bruni who has posed for nude pictures) as for his public service to the French state.

An advisor to Sarkozy offered this positive spin: “People are starting to understand how he works. He has an idea, says something serious, but not diplomatically, and then if necessary he’ll correct himself. If there’s a hullabaloo, he couldn’t care less.”

It is the “idea” part of the quote that deserves attention. Since arriving in office Sarkozy has proposed the organization of Europe’s six largest countries—Germany, France, Great Britain, Italy, Spain, and Poland—to form a European military. Yet reputation always seems to come back and hit you in the face. Historically France is not known for their lack of military involvement around the world, leading back to its departure from NATO more than 40 years ago. Even with Sarkozy’s recent statements that he wants back in the club, the state’s credibility within the European community might remain an issue.

Matt Hedrick

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Casual Dining Exposure Exposed…

The charts attached below show casual dining restaurants’ exposure to the better and worse performing regions of the U.S. relative to the national average from a comparable sales growth perspective in August and September 2008. For reference, in September, none of the regions had positive comparable sales growth so the outperformance and underperformance is relative to the average 4.1% same-store sales decline. CHUX, CPKI and RUTH have the most exposure to the underperforming regions of the U.S. while SNS and TXRH have the highest proportion of their restaurants located in the better performing regions.


Singapore’s Trade ministry released Q3 GDP data today showing a 0.64% year-over-year decline and the second consecutive decline on a quarter-over-quarter basis. The ministry also lowered their growth forecast for next year to a 1% contraction as demand for export is expected to continue to decline –increasing the likelihood that the Central Bank will pursue a weak currency strategy. If that is the case they are already off to a great start, Singapore’s currency has slipped 11% against versus the US dollar since July.

We like to keep an eye on Singapore. As one of the last true city-states they provide a fascinating economic vantage point into south Asia. If prospects are diminishing so rapidly for this mature economy, it raises question about the rosy growth assessments that central bankers in some of their large developing neighbors still espouse.

Andrew Barber


NTC business condition survey data was released today for the Eurozone showing a sharp decline to 4.1 43.61 on a year over year basis to the lowest levels in a decade. Economic contraction, particularly in the manufacturing sector, is increasing the pressure on ECB policy makers to lower rates further. The decline in manufacturing is also exacerbating the tension between EU partners - with French President Sarkozy taking a particularly shrill stance with the creation of a €20 billion fund to defend his nations “strategic companies” from ``foreign predators''.

Importantly, today’s NTC data also revealed that German industry came fared significantly better than the Eurozone aggregate with manufacturing coming in at 42.88 and services at 48.31. We continue to believe that, on a relative basis, the German economy is more stable structurally than the other major economies in Europe and remain long the German equity market via the EWG ETF.

Andrew Barber

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