Commodity Exposure Exposed – Fast Casual and QSR

The tables below highlight fast casual and QSR companies’ commodity exposure and their most recent cost outlook for fiscal 2008 and fiscal 2009. Please see my post from yesterday titled “Commodity Exposure Exposed – Casual Dining” for more details.


I guess Las Vegas casino executives will have to find a new metric to promote to investors. McCarran airport data just released suggest occupancy will suffer a major hit in October. The number of enplaned/deplaned passengers declined 12.8% which was only slightly better than September at -13.2%. September was the worst year over year decline since 9/11 impacted the last four months of 2001.

Operators have consistently used the tool of adjusting room rates to keep occupancy above 90% to leverage the big fixed asset called the casino. The inability to maintain occupancy even with double digit rate cuts is very disconcerting. Gaming revenues are likely to begin declining at a faster rate or the casinos will have to cut rates even more and endure significant margin erosion. Not pretty.

We’ve dusted off our model which has been very accurate in projecting gaming revenues from just the airport data. October 2008 gaming revenues could fall by 17% assuming a normalized slot and table game hold percentage. Last year in October, slot revenue was boosted by an abnormally high hold %. On the table side, October volume was unusually high given the visitation level. October 2008 faces this tough comparison which should amplify the 12.8% McCarran drop.

If occupancy levels track the airport data, this will be a very bad signal for the duration of this downturn. I suspect any sustained Las Vegas recovery is a long way off. This is not good for MGM.

October will not prove to be very kind to the operators based on the airport data

I Dare You

“The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”
-Lou Jiwei (Chairman Of China Investment Corp.)

It is a very rare opportunity that I can start my morning missive with a real time quote. This morning’s quote is from a leader in the Chinese Financial System and it may very well be one that my son Jack uses when he is studying this period of reactive American financial leadership. I never thought I would see the day when the Chinese looked like they were wearing the world’s financial leadership pants. Never say never.

It’s both pathetic and sad that our vaunted American billionaires tried to plug the Chinese with toilet paper, thinking that they’d get away with it. The aforementioned quote by the Chairman of China Investment Corp is one of disgust. He is staring at $6 billion in losses on his Blackstone and Morgan Stanley paper. He is very fluent in math. He understands what not to do when someone compromises their handshake – walk away. We don’t have a liquidity crisis in America anymore. We have a credibility crisis.

Spare me the excuse making, the finger pointing, and that embarrassing new CNBC commercial that reminds us that “my name is Charles Gasparino, and I am CNBC.” Our “New Reality” Investment Theme for 2009 is unfolding here real time on a global stage, and we need to wake up and get with the program. He or she who has the cash, now has the leverage.

Long gone are the days of Goldman levering their brains out and calling those investment returns repeatable. Their latest candidate for US political office, CEO Lloyd Blankfein, is cited in the Wall Street Journal this morning insinuating that he disagrees that leverage ratios and Goldman’s returns are correlated. Pardon? Send that math to the Chinese to run, and see if they come up with the same answer. This isn’t an Olympic synchronized diving competition, but man are some of our said leaders out of sync with reality.

Goldman’s stock price goes down every day for a reason. The global investor who owns the duration of their trades owns the ultimate card at the table of global finance - they own themselves. A compromised US government owns Goldman, and maybe that makes the most sense because Goldman’s ex-CEO and the US Secretary of the Treasury are one and the same. Trust me, the Chinese get this. So does anyone who has ‘You Tube’. Contrasted with the facts, “the policies of the developed nations on these institutions are not clear.”

Goldman is talking about starting an “internet bank” … or is Gasparino talking about his “sources” talking about it?... forgive me, I don’t manage my business around inside information, and I can lose track of the daily “he said, she said” that’s brought this US financial system to its knees. The people who have reactively put us in this mess need to just stop. That’s it. Listen to their own bearer of trading gospels past, Jim Cramer, and just “stop trading.” He was a Goldman guy too – this will work. They all whisper and listen to one another.

If I wasn’t in print all the way back to last December calling the top in Goldman’s valuation and stock price, my keystrokes here would have far less impact. This is the point. When you proactively prepare your business for foreseeable risks, you put yourself in a position to win, every day. America is tired of losing. It’s time to change the lineup before the Chinese run the tables on us.

Hank “The Market Tank” Paulson is going to blast into China in the next few days and tell them to let their currency appreciate. In order to remind Mr. Compromised who is wearing the pants, the Chinese let the Yuan trade limit down last night (0.50%), taking it to a 5 month low and down -0.86% in the last 3 days. The Chinese stock market tacked another +4% move onto their most recent leadership move. Since the beginning of November, the Chinese stock market is +15%. The SP500 and Goldman Sachs are down -16% and -32%, respectively, since November the 4th. The Chinese “don’t dare” invest in the USA all of a sudden. Do you blame them?

There is plenty of blame to go around, and I am done dishing it out to GS for today. There’s a new Wall Street watch dog coming to town in the coming months. Her name is Hillary R. Pelosi – R, as in Regulation. As a result, my call on the compromised, conflicted, and constrained business model of “Investment Banking Inc.” is going to find itself in the main stream halls of consensus.

Being right on this wasn’t fun. It’s actually quite saddening. I, like the Chinese, dare you to run out and buy the investment bank financials today. During the 5 day squeeze, they rallied +35%. The XLF (financials index) is now trading at $11.40, and I see 22% downside from here on a break down and close below the $11.09 line. I shorted Bank of America (BAC) yesterday because, as the compromised US Federal Reserve cuts rates to zero, the bastion of US Capitalism (a positively sloped yield curve) is starting to flatten again. Borrow short, and lend long is a lot harder to do when the curve is flattening, rather than steepening. I dare Blankfein and Paulson to challenge the math behind that.

I have moved back to a 79% position in cash. I have a zero position in US Equities. I remain long China. My downside target for the SP500 is now 749. On a close below the 835 line, watch out below. Obama, Volcker, and Summers won’t be playing for us for another few months. Markets, like the Chinese government, wait for no one.

Keep your head up out there today,

Long ETFs

GLD -SPDR Gold Shares - Gold declined in London as the dollar traded close to its highest in more than a week against the Euro.

OIL iPath ETN Crude Oil --Light Sweet Crude futures fell as low as 47.06 this morning despite comments in the press from Qatar’s oil Minister, who confirmed OPEC intentions to reduce production at their next meeting on December 17th.

EWG – iShares Germany  --The DAX Index declined  1.8 % to 4,452.59 this morning with Infineon technologies (EWG: 0.35%)  down 24% on Q4 losses and Volkswagen AG (EWG: 13.6%) down 2.5% on declining auto sales in the US.

FXI –iShares China  --The CSI 300 Index rose 4.5% to close at 1,952.67 while the Yuan declined the full 0.5% limit from yesterday’s reference rate reaching 6.8845 USD in trading.

Short ETFs

IFN iShares India --The Rupee rose by 0.6% to 49.845 USD this morning while the Sensex declined 0.3% to 8716. Tata Steel announced a series of cost saving measures including layoffs.

EWU – iShares United Kingdom --The FTSE 100 traded down by 0.8% to 4,089.86 this morning  with Rio Tinto group (EWU: 2.7% ) down 6.7% on lessening demand for copper and Stagecoach Group (EWU: 0.1%) down over 20% on lower guidance into 2010.

UUP – U.S. Dollar Index --The pound declined to 1.47 USD this morning near the lowest level in 6 years.

EWJ – iShares Japan --The Nikkei 225 rose  1.8% to close at 8,004 today with Toyota Motor Corp. (EWJ: 5.61%) down nearly 2% on US sales which declined 34% year-over-year in November.

FXY – CurrencyShares Japanese Yen Trust  --The yen  declined to 93.42 USD in trading this morning.

Keith R. McCullough
CEO & Chief Investment Officer

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Station management and Colony Capital blazed a trail last year in taking the company private, a trail now potentially headed for bankruptcy. That’s what happens when one levers up at the highest multiple, at the peak of market and the peak of the easy money era.
Station is now blazing another trail in eliminating employer matching contributions to employee 401(k) plans. Like many gaming operators, Station has laid off employees this year but this is the first I’ve heard of a gaming company cutting benefits. It’s hard to believe that employee morale and service levels won’t suffer. Station’s employees have seen coworkers laid off and now their benefits cut at the same time their 401(k)s are likely down significantly already with the stock market crash.

Whether this is the right move for Station at this juncture is debatable, but it certainly adds to the list of potential competitive disadvantages vis-à-vis Boyd Gaming in the locals Las Vegas market. Unlike Station, BYD is on the right side of the liquidity trade. We’ve written extensively on the advantages liquidity provides in this environment including:

• The ability to acquire cheap and strategic assets or companies in a buyer’s market with few buyers
• More cash for advertising, marketing, and promotional activity
• Liquidity to upgrade slot floor – this is a biggie
• Better maintained facilities overall

Better customer service should be the next opportunity for BYD to steal share. Employee relations are very important in this labor intensive and service oriented business. Happy employees provide better service. Ask Steve Wynn. Hopefully, BYD will capitalize.

US Regional Economics Part 1: It Matters... A Lot

Yeah, the national unemployment rate is heading higher. We get it. But unless you’re Wal*Mart, the ‘national average’ rate means squat. We need to look at the trends in each and every state.

Most retailers that have pointed out areas of weakness by geography have chirped the same song. Florida, Texas, Nevada, Arizona, and California. But what about Oregon, South Carolina, Georgia, Wisconsin and Louisiana? These might not be the epicenters of our economy, but they are showing meaningful deterioration on the margin in employment trends – yes, even more so than California.

Map 1 shows unemployment rate by state. Not a lot of surprises. West Coast in tough shape, South/Southeast feeling pain, Northeast hanging tough, and Midwest/Northern plains a mixed bag.

Map 2 is more meaningful. It shows the yy change in employment rate by state. The punchline is that many states that have been most resilient to date are the ones showing the biggest erosion in employment trends.

What’s the next step in this analysis? We’re taking the lat and long of every retailer and plotting to see greatest exposure/risk. We’ll come back to you with results shortly. In the interim, if there are any specific retailers you want results for, contact my team or Jen Kane (Director of Client Services).

Zach Brown and Brian McGough

The S&P 324

If the S&P held to its $4bn market cap hurdle, it would lose 166 components. With 75% of apparel S&P components under that level, this is something to consider.

What does it take to get removed from the S&P 500 Index? LIZ was booted last week due to not even coming close to hitting market cap hurdles. According to S&P, here’s what get’s you the boot from the index. One thing that is clear to me is that S&P has hardly been true to these standards on a consistent basis.

A company must “substantially” violate at least one of the following criteria for an “ongoing” period:

1) Market capitalization must exceed 4 billion
2) Adequate liquidity defined by having the ratio of annual dollar value traded to market cap great than 0.3
3) Corporate governance structure must be consistent with U.S. practice
4) The U.S. portion of revenues, operations, fixed assets, and employees must be a significant portion of the total.
5) Financial viability must be expressed through consecutive quarters of positive as-reported earnings and an operationally justifiable balance sheet.
6) Company should not be involved in mergers, acquisitions, or significant restructuring.

Recently, the Nasdaq temporarily removed their minimum market cap rule…

Below is a chart of the lowest market cap companies in the apparel space:

Zach Brown
Jr Analyst

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