- Unfortunately, PFCB was one of the last casual dining companies to come to grips with the reality of today’s restaurant environment. As a result, it was not until 2Q08 that the company slowed its capital spending on new units for both Pei Wei and the Bistro and closed underperforming stores. Some of the benefit of the 10 closed Pei Wei’s will help the company as we head into 2009. Specifically, management said that they expect pretax income to improve by $2 million annually and for Pei Wei’s operating margins to improve by 70 to 80 basis points.
- Clearly, there are some critical changes that PFCB can make to better position the company that will allow PFCB to weather the severe issues facing the industry. Unfortunately, the company has a significant number of its stores in parts of the country that have been severely affected by the downturn in the economy. Specifically, Arizona, California, Florida and Nevada accounted for 78% of the company’s total same-store sales decline in 3Q08. See our post “Casual Dining Exposed” for specific details on a number of casual dining concepts’ regional exposure within the U.S.
- The last time the company provided guidance to the street management guided FY08 EPS to $1.34-$1.40, lowering the range from $1.36-$1.42. Currently the street is at $1.38. Complicating this guidance has been a significant downturn in sales trends since PFCB provided guidance.
Under the guidance of our futures guru, Andrew Barber, we keep our eyes diligently focused on many futures markets to find anomalies. Currently the Oil futures market is showing a widening contango, which is a data point that is actually contrary to our long thesis, for a Trade, on Oil. Obviously, the futures curve is only one data point, but is still worth noting.
As the chart below depicts, contango in the Oil market has widened dramatically in the last month, primarily based on the almost $10 per barrel decline in front month futures. Longer out on the curve, futures have stayed largely stable, which suggests the longer term view of supply and demand has not changed. In the short term, with the decline in front month futures, the Oil futures market, at least, seems to signaling short term over supply as physical producers are being paid to store Oil, which could lead to building inventory.
“Success depends upon previous preparation, and without such preparation there is sure to be failure.”
Proactive preparation continues to allow us to profit from some of the best short squeezes in US stock market history. Those attempting to manage other people’s money reactively have their own predictable issues to deal with. The longer we keep them, Goldman, and Citigroup in the game, the better. Without the crisis’s that they perpetuate, we would never be able to “Trade” US Equities from the long side as aggressively. I would never get the terms I just got on a CA office lease. This is the “New Reality.”
Fortuitously, in our Early Look from Friday morning (“Studying History” www.researchedgellc.com, 11/21/08) I took the shot and made the call that I saw an immediate term “Trade” opportunity for the S&P500 to test 858 (14% higher). Yesterday’s market traded above that line intraday, and we started to sell into it. Call it my luck, or call it my process – I am cool with either. Most people in this business claim that “you can’t make market calls.” I agree, wholeheartedly… most of them can’t. However, with the right process, “Yes, We Can.”
Economic history buffs can mark down the last 2 days of US trading as the biggest two-day rally in the S&P500 since 1987. Don’t we all feel great about some of our long positions now? Or are some of you feeling shame having shorted the US Financials 2 days ago, prior to their +19% move? I for one wish I’d covered our Morgan Stanley short position in the ‘Hedgeye Portfolio’ on Friday, but I didn’t… and the ‘You Tube’ replay doesn’t have that “Investment Banking Inc.” editing feature. We stand on our own decisions every day in this business and we should be transparently accountable for all of them.
Prince Alalweed seemed ready and willing to be ‘You Tubed’ yesterday on CNBC’s power hour lunch, or whatever it’s called… that segment where they have the “money honey”, Maria Bartiromo, enlighten us with her very serious sounding “exclusive interviews”. Prior to my securing a buck a foot lease yesterday from a Lehman project that’s distressed (buy low), I was entertained by the Prince who was front center, being interviewed about Citigroup.
The Saudi Prince is a 5% holder in the company – did we need an “exclusive” on proactively predicting that he would step up and push his own book? What did we expect the man to say, other than he loves the idea of US government bailout money? The man was sitting in the middle of the desert in a Four Seasons looking chair, wearing Paris Hilton shades and some sort of scarf with a leather vest. There were camels and horses, and a Western looking campfire burning in the background. Fully loaded with Maria’s line of ingenious analytical drama, I felt like I was watching Young and The Restless.
Unfortunately, the global mania in stock markets has not been fully washed out. The aforementioned live episode from Riyadh, Saudi Arabia is a metaphor for the ridiculous. Do not mistake the last 2 days of a short squeeze for a fundamental change in the US stock market’s negative intermediate “Trend.” The Prince coming to his drowning equity portfolio’s rescue while “Pirates” are stealing his country’s oil ships is what it is. It should be understood, and taken advantage of – not mistaken for research edge.
This morning is the first one in November where the downside risks to the US stock market outweigh the upside reward. My upside target for the S&P500 is 901, and my downside test level is 751. The math here isn’t as trivial as Alalweed’s new look. We’re looking at -12% downside versus 6% upside. With the US Dollar getting hammered yesterday, commodities zoomed higher alongside stocks… so I sold down our US Equity exposure to 12%, and invested in a bond for the 1st time in 2008 (TIP, Treasury Inflation Protected bond fund).
On balance, I don’t like bonds yet because I think long term cost of capital will continue to increase in 2009 as access to capital continues to tighten. Ask the government of Pakistan how these new bailout terms from the IMF feel. They had to raise rates to 15% just so that they could get the money and save their debt from defaulting. Sound familiar? Yes, this sounds like one of our favorite shorts this year, MGM Casinos, who had to pay the same rate for their most recent $750M in financing. Have no fear though… there are surely a lot of newly unemployed dudes wearing those shades that the Prince had on yesterday that are getting all amped up to roll the bones and stoke a resurgence in the table hold at the Bellagio!
The TIP bond fund pays us a 10.5% yield and is a call option on the US government doing everything in their power to re-flate their way out of this deflationary spiral. This has always been in the “Heli-Ben” playbook. This is why the Commodities CRB index had a melt-up +5.1% day yesterday. Every day that we move closer to December is one more closer to free money US interest rates. Free money is as cool as those shades that the “money honey” was digging yesterday on the E! Channel’s new competitor in “The New Reality”. Capitalize on manic behavior. Buy low. Sell high.
Best of luck out there today.
TIP –iShares Lehman TIPS Bond --10 Year Yields dropped 11 basis points to 3.22 yesterday in advance of today’s Treasury Dept./Federal Reserve announcement.
OIL iPath ETN Crude Oil –Front Month Light Crude futures fell below 52.50 in early morning trading. In an interview yesterday Venezuela’s Oil minister strongly endorsed a further one million barrel a day reduction by OPEC in advance of the producing nations meeting in Cairo this weekend
EWA –iShares Australia – The ASX 200 Index gained 198.30 points, or 5.8%. BHP Billiton (EWA: 13.5%) announced an end to its attempt to acquire Rio Tinto Group (EWA: 3.18%) citing commodity price declines and difficulty in the debt markets. BHP rose by over 20% on the announcement, while Rio Tinto’s shares declined sharply –reaching level 40% lower than yesterday’s close.
EWG – iShares Germany --Q3 GDP levels release today show a declined 0.5% from Q2 while exports declined by 0.4% from the last quarter. Volkswagen AG (EWG: 13.6%) declined by 14% on news that it would cease production for 3 weeks at its Wolfsburg facility due to cooling demand.
FXI –iShares China –Central Bank inflation forecasts were adjusted down to 6% for this year and as low as 3% for next on declining commodity and energy prices. The World Bank decreased its growth forecast for the Chinese economy in 2009 from 9.2% to 7.5% urging leaders there to focus on developing domestic demand.
VYM – Vanguard High Dividend Yield ETF –Yesterday’s rally in crude oil lifted shares of Chevron (VYM: 4.11%) by 5.4% and ConocoPhillips (VYM: 2.92%) by 5.7%.
EWU – iShares United Kingdom – BOE Governor King said “We may not have come to the end of recapitalization,” in a speech before parliament yesterday. British Bankers Association data showed a decline of 50% for home loan approvals in October.
UUP – U.S. Dollar Index –An announcement detailing the joint Treasury Department/ Federal Reserve consumer lending package is expected in a press conference today at 10am. GDP figures will be released this morning with surveyed economists predicting a decline of over 0.5% from the prior quarter.
EWJ – iShares Japan --A BOJ report released today reduced growth forecast for the next several quarters. The Nikkei 225 rose 5.2% on the US/Citigroup bailout news to close at 8,323.93.
FXY – CurrencyShares Japanese Yen Trust – The yen rose to 96.81 per USD in trading today.
- Part of the explanation is that slots to new casinos and casino expansions comprised a bigger share of total slot sales. IGT’s market share into the replacement market always lags because, as the industry’s largest supplier, the company offers volume discounts and ancillary products and services if operators guarantee a target share for a new casino. As can be seen in the second chart, new unit sales jumped to 75% of total units in Q2 2008, although it dropped off dramatically in Q3 while IGT still maintained its market share.
- IGT also tends to do well in locals markets due to the popularity of video poker, a category which it dominates There were a number of new locals oriented casinos that opened in Q3. Quarterly market shares can fluctuate significantly. However, it is somewhat encouraging that IGT’s market share seems to have stabilized at around 40%, about where it was from Q4 2006 to Q3 2007.
- Overall, Q4 sales to new casinos and expansions are likely to be up around 40% year over year. No wonder there was so much optimism at G2E last week. The suppliers are generally having a good quarter. I’m a lot less optimistic about 2009, particularly the first half.
We started following the Spanish market actively this spring as the real estate market there began to decelerate at a rapid pace. The collapse was preceded by years of massive speculation with new home construction hitting an annualized 700,000 by Q3 2007. The housing boom helped Spanish household debt balloon -in December 2002, total mortgage loans equaled 52% of GDP but by Q2 of this year it exceeded 99.5%. The bursting bubble and subsequent fall-off in new construction has predictably spurred higher unemployment with a decade record rise in Q3 to over 11%.
We are revisiting our work on Spain this week as part of our continuing work to explore relative value opportunities with the EU.
Obviously the Clinton tone begins with Senator Hilary Clinton and her likely appointment as Secretary of State, but actually resonates in almost every purported appointment, including Bill Richards as Secretary of Commerce (Energy Secretary and Ambassador to the UN under President Clinton), Timothy Geithner as Secretary of Treasury (Assistant Secretary of the Treasury for International Affairs under President Clinton), Rahm Emanuel as Chief of Staff (Senior Advisor to President Clinton for Policy and Strategy), Larry Summers as Special Economic Advisor to the White House (Secretary of the Treasury under President Clinton), and Eric Holder as Attorney General (Deputy Attorney General under President Clinton).
While on one hand these nominations are hardly inspiring as representatives of change, they do, admittedly, represent competent and broadly respected appointees. The economic appointees are most interesting in the context of the country’s current economic ills and while on the margin any semblance of change is probably good, it is hard not to accept some of these appointees with an air of caution, in particular the most relevant position of Secretary of the Treasury, Timothy Geithner. In particular, when we see headlines such as “Timothy Geithner: Obama's Pick for Treasury a 'Great Man for the Job”, we get concerned that expectations are becoming elevated for his performance.
Following Senator Obama’s victory, we had posted on the potential choices for Secretary of the Treasury and we had suggested that Geithner was one of the top three choices, although we preferred Larry Summers as a more experienced and economically rational choice. We are not willing to say that Geithner is a bad choice, as he is not even on the job yet, but as we wrote on November 5th, 2008 in a piece we titled “Obama Treasury Secretary: The Top Contenders”, we wondered “whether he has the experience to manage the current crisis.”
Current Secretary of the Treasury Paulson, at least on paper, appeared to have strong experience, but clearly he has been a disappointing Secretary to say the least and has mismanaged this crisis due to very ineffective communication and a lack of a cohesive plan. While we were early in criticizing Paulson, and actually calling for his resignation, it is now a consensus view, so we won’t dwell on it. Our three most noteworthy red flags on Geithner are based on experience, association with Bob Rubin, and his involvement in trying to “solve” the current crisis.
Until recently, former Treasury Secretary Robert Rubin had an incredibly austere reputation. He was a very successful Secretary of the Treasury and considered an elder statesman and consigliore of sorts in the finance industry. Both Geithner and Summers are reputed to be followers of Rubinomics, which as the New York Times noted today is a combination of “balanced budgets, free trade and financial deregulation”. Obviously, the deregulation pursued under Rubin / Clinton is coming under criticism, due to the current economic crisis, which has as a root cause financial deregulation. Additionally, Rubin’s role as a Directory and Senior Counselor to Citigroup, the most recent of the nation’s banks to be ostensibly taken over by the government, is rightfully being closely scrutinized. So what was once a positive attribute, that is a long association with Robert Rubin, must now be viewed with caution.
At 47, Geithner is youngish for a Treasury Secretary, but age is hardly a fair arbiter of potential success especially given that the President Elect is the same age. Our primary issue with Geithner’s experience relates to the fact that he has had literally no real world business experience or deep academic economic experience. He is a career civil servant, with a Masters in International Economics, and while has been adept at handling his role as President of the New York Federal Reserve, his real notable accomplishment is his leadership role in this current crisis, a solution whose resolution is far from clear.
Geithner’s elevation to Secretary of the Treasury is largely a function of this role in helping to manage and implement a plan in the current economic crisis. As Secretary Paulson stated in a news release following word of Geithner’s nomination:
“I have the highest regard for Tim – his judgment and creativity have been critical to designing and implementing the necessary actions we’ve taken to protect and strengthen our financial system.”
Geithner obviously did not solicit the comments from Secretary Paulson, but to the extent that he did play a critical role in the half baked, ad hoc plan that has been implemented by Paulson, we remain wary.
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