YUM – Initial Thoughts from Analyst Meeting

YUM’s senior management has a history of over promising and under delivering in the U.S. See below:

2007: At its December 2006 Investor Day, YUM provided 2007 U.S. operating profit growth guidance of 5%.

On its 1Q07 earnings call, the company revised this guidance and said that it did not expect to meet its 5% long-term growth goal but that operating profit growth should be positive.

2007 U.S. operating profit came in down 3%.

2008: At its December 2007 Investor Day, YUM again provided 2008 U.S. operating profit growth guidance of 5%.

On its 2Q08 earnings call, the company lowered this guidance and said that U.S. operating profit should decline about 3%.

U.S. operating profit year-to-date through 3Q08 came in down 11%.

2009: Today, at its December 2008 Investor Day, YUM provided 2009 U.S. operating profit growth guidance of 15% (9% from expected G&A savings).

2009 will come in ???

The company is obviously lapping an extremely easy comparison from 2008, but the company has been lapping easy comparisons (not as easy as 2008) for the last 5 years.

YUM is expecting to grow EPS by at least 10% in 2009. The company has been successful in achieving this goal in recent years with little to negative operating profit growth in the U.S. so positive growth in 2009 should help to make this an easy feat. However, YUM has also reduced its share count in the last 5 reported years and is on target to repurchase nearly $1.7 billion in stock in 2008. The company’s significant share buybacks have helped to support YUM’s annual EPS growth. Currently, the company does not expect to buy back any shares in 2009, largely because the company levered up significantly in 2008 in order to maintain its share repurchases in 2008.

SP500 Levels: Intraday Look...

It takes a bear to know one, and I think the bears are really struggling with this momentum change in the US market.

In the immediate term, I see a narrowing trading range developing (see chart). On balance, this is bullish. For now, the days of an 80 VIX are gone. From a short term momentum perspective, breaking and closing below 62.26 is negative for the VIX. Deflating volatility with accelerating volume on up days provides for a new range to trade the SP500 with an upward bias. If the SP500 can hold my new line of support at 878, I wouldn’t be surprised to see the VIX test 50-52 on the downside.

There are two very important macro calendar catalysts that I foresee the bullish narrative clinging to. First will be Friday’s bullish PPI report (inflation is dead will be ringing all over Barons this weekend is my guess), then we will have “Heli-Ben” come in and drop FREE moneys from the heavens next week at the FOMC meeting.

At a bare minimum, don’t be short these 2 catalysts.

My immediate term upside “Trade” target for the SP500 is 931.

Eye On China: Meet The New Boss

Chinese Banks land on the US Shore…

Following in the footsteps of Bank of China and ICBC, state-owned China Construction Bank (CCB) announced today that it will open its first US branch office in New York that will be primarily focused on commercial lending, trade finance, and foreign exchange. ICBC, China’s largest commercial lender, opened its first US branch in New York City in October while Bank of China, the most international of China’s banks, already has three US branches.

CCB, one of China’s “Big Four” state-owned banks, ranks second with 8.25 trillion Yuan (1.2 trillion USD) of total assets, behind Industrial and Commercial Bank of China (ICBC) and ahead of Bank of China and Agricultural Bank of China. The bank has approximately 13,629 domestic branches in addition to offices in Africa, Europe and elsewhere in Asia.

Former Bear Stearns exec, Ace Greenberg, commented yesterday that “its over” for Wall Street as we knew it. Nine and twelve months ago, I took plenty of heat for my “Hank The Market Tank” and “Investment Banking Inc.” calls. I wasn’t trying to be funny. I was being realistic. Now that this comic tragedy is playing at a theatre near you, it’s more palatable to talk to your friends about it at this year’s holiday parties.

It is natural next step for the new Chinese Capitalist banks to take advantage of their being liquid long cash and build a presence in the USA. We should be thankful for their arrival. We need new bosses in The New Reality. I am sure they are licking their chops borrowing at 0.00% for 3-month US Treasuries, then lending long higher – that’s what proactively prepared capitalists do.

We remain long China via the FXI and EWH etfs.

Keith McCullough
Chief Investment Officer

Matthew Hedrick

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Aggregate Macau revenues in November were probably better than expectations, up 3%. However, growth has slowed considerably and will turn negative over the next few months. The flood of credit that permeated the market earlier this year has receded. Beijing’s tightening of the visa spigot prevents the mass market from filling the gap. It’s all about market share for awhile.

The most important take away from November is the continued market share loss in both Rolling Chip (RC) and Mass Market (MM) by Wynn Macau. Wynn lost almost 3% of MM share in the last 2 months, including 1.2% in November alone. On the RC side, Wynn’s share dropped 4.5% and 1.7%, respectively. At least as it relates to RC, the lost share is not related to luck. Wynn’s share of RC turnover fell 2.4% in November.

After 2 months of the quarter, Wynn Macau appears to be tracking below Street consensus for revenue. Unfortunately, Las Vegas will likely fall short as well. October Strip revenues just came out and they were horrendous, down 26%.

WYNN remains a great company with a terrific balance sheet and liquidity. While they are the best positioned in each of their markets, estimates need to come down, potentially materially. An early January pre-announcement is increasingly likely.

Trend vs. Trade – A look at CAKE, STZ, DF, WEN, SBUX and MCD

The multi-factor approach:

CAKE - CAKE, finally looks like it's a long, for a "Trade"…….

STZ - wine worked again today; STZ continues to flash + divergence on my screens as of late...

DF - DF looks ok still here; holding 15.07 is bullish, closing below that line puts 12.87 in play...

WEN - WEN, we sold well, but looks like a repo as long as it can hold 3.65….

SBUX - SBUX ran into the goal post (Canadian Football) and failed to hold on in the end zone at 9.44 today…

MCD - Big line in the sand here is 58.38… Ackman’s McDonald’s is not Kroc’s… inasmuch as Blankfein’s GS not being Marcus’

The Fundamentals:

CAKE – 60% of CAKE’s store base is located in the states that are exposed to the worst part of the economic down turn. As a result, the fundamentals are very ugly, but at some point that is baked in.

STZ – Working on a fundamental thesis

DF – If we can get past the Organic issues, the balance of the business is rock solid, but with leverage.

WEN – WEN is in a strong position to right size the ship.

SBUX – I just got an email from SBUX – Christmas is 20% merrier this year! December 9-15th As a SBUX Gold member, I now get 30% off my purchase…… Last week at the analyst meeting they were talking about not discounting in the store, but using discounts at other retailers like Costco and/or using a “card.” Did things change so quickly? However, not only can you get 20% off on all merchandise in

SBUX’s stores, you can also buy SBUX’s stock for 60% off from last year.

MCD – I’m concerned about where MCD is headed. I don’t like the premium coffee strategy in 2009. At the same time the $ is will significantly cut in the perception of how strong MCD growth is ….

I'm Lovin' It

“The quality of a leader is reflected in the standards they set for themselves”.
~ Ray Kroc, Founder of McDonald’s

While the Governor of Illinois is being ‘You Tubed’ and shamed across the national media this morning, remember that getting rid of the compromised said leaders of this country is an integral part of the bull case associated with our Investment Theme for a “New Reality” in 2009. Transparency and Accountability will be a winner. Be on the right side of this leadership trade.

If you want to follow the losers, get yourself a chair and a TV set at 5PM EST, and get bogged down by “Fast Money” flashing charts of the early 1970s US stock market. Guys, where were these charts prior to the SP500 dropping 43%?  Do me a favor and stop being alarmist after a US market down day.

These charlatans of CNBC network emotion actually mentioned “behavioral finance” more than once on their show last night – they should spare us the one liner and pick up a book and educate themselves on the topic. As neuroscientist Richard Peterson appropriately points out in his latest behavioral book, “Inside The Investor’s Brain”, being self-aware is an important sign of intelligence. CNBC’s finest all share one unique characteristic – they are unaware.

Barack Obama is seemingly proving to be aware and I think that his standard of self confidence is one that Americans can buy on down days. I bought our 2nd tranche of the SP500 yesterday around the 886 level. There is significant support building at the 881 line, and this lines up pretty well with the political and confidence stats that were issued this morning.

After flashing a very oversold reading of -27 in one of my key sentiment indicators last week, this morning’s Institutional Investor Bullish to Bearish survey popped out of its hole to -21. We measure deltas here at Research Edge, because both math and what occurs on the margin of that math is what matters most to our multi-factor macro models. If you sold into the US market lows of last week or yesterday afternoon, it’s all one and the same by our scorecard – you sold alongside consensus, because you were probably unaware that you have become it.

In a surprisingly positive political poll reading overnight, the Bloomberg/LA Times poll flashed a 7 handle on Americans feeling better about the pending leadership in this country. Seven handle as in over 70% of Americans feel either “hopeful”, “optimistic”, or “proud” of Mr. Obama. After hearing plenty a market and political pundit trash this young man for being nothing but a speech maker, being long this market this morning feels as good as those polls did. I know, I know… polls are polls … and Obamerica is nothing but a place far far away from reality – but guess what, on the margin, I’d rather be there than in the Bushes.

Markets trade on sentiment. Multiples are based on confidence. If you don’t have either, go to cash. Building American confidence that there can be a Ray Kroc grinding away like he was in 1954 when he took over the McDonald’s franchise is what Americans not only want, but need. I am reading a headline this morning of one of the top 5 American muni-bond underwriters (Goldman Sachs) being waterboarded by the press for telling clients to buy CDS on New Jersey’s paper – this is the America of yesterday folks.

Neither Marcus Goldman nor Ray Kroc would have put up with a firm issuing NJ bonds, then advising others to short them. It’s ridiculous behavior. Rather than waking up to the embarrassment of the Illinois Governor this morning, these two Americans woke up every morning carrying the principles of true American Capitalism on their backs.

Chinese Capitalists continue to prove that they have read a book or two about the good old fashioned American days when Kroc would stand on his “handshake with spit.” As crude as that sounds, is as effective as trust is. The Chinese trust themselves. Stocks in Hong Kong raged higher again last night, despite “Fast Money” and Cramer whining about why they can’t be bullish on the USA yet. The Hang Sang closed up another +5.6% at 15,577, taking its “Re-flation” since the October 27th capitulation low to a +41% move! What? Did some investors miss that?

We remain long China, which also closed up another 2% overnight, taking its run-up in the last month alone to +21%, and Hong Kong via the FXI and EWH etfs. The best part about those analyzing China right now is that they are staring in the rear view mirror. Last night, China printed a horrendous export number of -2% year over year for November… but guess what? … its December. Stock markets do not trade on yesterday’s news. They are some of the most stealth leading indicators of the future that I have in my macro models.

The future in this country looks less dark than it did 3 months ago – that’s why I have taken our Asset Allocation model’s position in cash down from 96% to 54% in the last 3 months. We have a 12% position now in US Equities. On the International side, we own more China than any other country and we are also longer Commodities than we have been for all of 2008.

While “Fast Money” is flashing you those 1970’s charts, flash them a picture of one Ray Kroc buying the San Diego Padres on the cheap in 1974, or one of the many real estate sites he acquired while the lemmings were selling to him low. This is all part of that “Behavioral Finance” idea that dawned on Dylan Radigan last night.

Last night is over - I’m looking forward to today and tomorrow. I’m excited for the confident and liquid long American Capitalist who had his or her feet on the floor early this morning. I’m long San Diego real estate at a buck a foot. That’s in line with Kroc’s value menu, and “I’m Lovin’ It!”

Have a great day,

Long ETFs

SPY-S&P 500 Depository Receipts – CME front month futures contracts rose over 1.5% this morning reaching a high of 906.80 prior to 7AM.

XLV Health Care Select Sector SPDR – An advisory panel to the USDA unanimously backed a Genzyme Corp (XLV:1.6%) osteoarthritis drug.

GLD -SPDR Gold Shares –LME spot gold rose 1.3% to 787.11 per metric ton in trading this morning.

OIL iPath ETN Crude Oil – NYMEX front month Light Sweet Crude contracts traded as high as $43.49 this morning.

EWG – iShares Germany –A $15 billion government rescue of the US automobile industry is said to stabilize the parts supply chain in the US for German automakers BMW and Daimler. The DAX is down slightly in trading this morning to 4762.79, or -0.33%.

EWH –iShares Hong Kong –The Hang Seng closed up 824.52, or 5.59%, to 15,537.74.

 FXI –iShares China – China’s PPI rose in November 2% Y/Y, half the pace estimated by economists, after gaining 6.6% in October, representative of decreased commodity and energy costs. The Yuan rose to 6.86 against the dollar from 6.8651 before the producer-price announcement. The CSI300 closed up 55.54, or 2.74%, to 2096.39.

Short ETFs

EWU – iShares United Kingdom –The FTSE100 is trading slightly to the downside this morning to 0.86% at 4342.98, led by retailers, after Morgan Stanly said sales during Christmas could be the worst in many years.

UUP – U.S. Dollar Index –The Pound rose to 1.4796 USD, while the Euro remained close to flat at 1.2932 USD.

FXY – CurrencyShares Japanese Yen Trust –The Yen fell to 119.84 EUR and 92.71 USD  in trading this morning  while the Nikkei closed up 3.15% on expectations the government will extend aid to real estate developers.

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