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After the close, JACK reported a decent quarter on nearly every metric, but the quarter also highlights why the company is not getting the “full” valuations it deserves.  Our thesis for owning the stock today is centered on improving operating performance and better valuation stemming from a less volatile business model.  We will learn additional details on the conference call at 11am but it is likely that much more will emerge at the analyst meeting next week.


JACK is reporting FY Guidance (9/12) of GAAP EPS of $1.15-1.40 and operating EPS $0.95-1.10.  The reality is that the only number that matters is what the core earnings power of the company is.  So when the popular financial press is reporting that it is “unclear which range is comparable to FactSet $1.32” we immediately have a problem we don’t need to have.  When things are unclear or uncertain, people shy away.  By the end of FY12, this issue should be going away – a net positive.


Included in operating earnings this quarter were re-image incentive payments of $5.7 million, or approximately $0.08 per share versus $0.02 last year and $0.06 per share in impairment charges. 


Operating EPS Calculation

GAAP: $0.27

Refranchising Gain: ($0.02)

Franchise payments: $0.08

Impairment charge: $0.06

Operating EPS: $0.39


In 1Q12 Jack in the Box company same-store sales were 5.3% versus consensus +4.1% and guidance of +4-5%.  Franchise same-store sales were 2.8%, bringing the system same-store sales number to 3.6%.  Qdoba system same-store sales were 3.8% versus consensus +2.9% and guidance for +2-3%. 


Consolidated restaurant operating margin was 13.5% vs. 12.6% last year with an 8% increase in commodity costs.  This represents the second quarter in a row where the company is operating with positive same-store sales and expanding margins – the “Nirvana” quadrant in the chart below.  Typically, companies operating in that quadrant are awarded a higher multiple by the Street.


In the press release, management upped its same-store sales guidance for the fiscal year 2012 to +3-4% at Jack in the Box restaurants versus prior guidance of +2-4% and +4-5% at Qdoba system restaurants versus prior guidance of +3-5%.  Given that the bulk of the Jack-In-The-Box restaurants are in “non-weather” states, the favorable impact of weather in the first calendar quarter will be much less significant than for others in the space.


From an operating perspective, JACK reported a strong quarter.   More details to come at 11 a.m.


JACK – ONE STEP CLOSER - jack quadrant


JACK – ONE STEP CLOSER - jack pod1


JACK – ONE STEP CLOSER - qdoba pod1



Howard Penney

Managing Director


Rory Green


Bad Macro

This note was originally published at 8am on February 09, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The macro is so bad everywhere.  In America, our political leadership is doing nothing to help us get out of the current situation.  Worldwide, Europe is just in a state of financial collapse.  I think we are in plenty of trouble and have to watch ourselves closely.”

-Julian Robertson on CNBC, September 13th, 2011


While Julian Robertson is retired from managing other people’s money, prior to his retirement he established probably the best long term record of any money manager with a reported annual return of north of 30% from 1980 to 1998.  More impressive to me has been his ability to mentor, train, and seed successful money managers after retiring from the business himself.


I’ve had the pleasure of meeting Mr. Robertson a number of times.  The most notable for me was while I was attending Columbia Business School  and took a class called, “The Analyst’s Edge”, which was taught by John Griffin, founder of Blue Ridge Capital and the former President of Tiger Management.  This class offered me, and my fellow students, a crash course in analyzing companies from the practitioner’s perspective.  In lieu of a final exam, our final grade was based on pitching a stock to Julian Robertson in the Tiger Management boardroom. 


Not only was the situation itself intimidating, but the company I had spent the semester researching was Ace Aviation, more commonly known as Air Canada.   As background, in 1999, the year that Tiger Management dramatically underperformed the SP500 and eventually shut its doors, U.S. Airways was purportedly Tiger’s largest equity holding and a key reason for the underperformance.  So, yes, I was pitching an airline to Mr. Robertson, even though it was the industry that had burned him a few short years before.


Shockingly, despite my somewhat sweaty palms, the pitch actually went relatively well.  Mr. Robertson was very thoughtful in his questions as it related to my thesis, which was primarily based on a sum-of-the-parts analysis, and seemed very intrigued by the idea.  Now, of course, he may have just been trying to be polite, but I think the better answer is that a key reason he was, and remains, one of the world’s great investors, is his ability to have an open mind and change opinion.  In effect, he showed incredible mental flexibility.


I highlighted the quote above to flag the simple fact that Mr. Robertson went on CNBC to emphasize how negative the macro was at the literal 2011 bottom of the stock market.  In fact, since September 13th, 2011 the SP500 is up more than 15% and the Euro Stoxx 100 is up more than 23%.  On an annualized basis, those moves would equate to some of the best annual equity index returns in the last hundred years.  So, was Julian Robertson wrong based on his dour September 13th, 2011 macro outlook?  Well, that ultimately depends how his portfolio was positioned for the last four months.  My guess is that Mr. Robertson and his protégées managed the environment quite effectively and kept their feet moving.


Interestingly, on September 13th our CEO Keith McCullough (he is on the road today in Boston) wrote the Early Look and while we shared an eerily similar fundamental view as Mr. Robertson, Keith wrote the following that morning:


“Great short sellers in this game have one thing in common – they know when to cover . . . I’ve written 2 intraday notes in Q3 of 2011 titled “Short Covering Opportunity” (one on August 8th and one yesterday). Yesterday’s call to cover shorts generated as much questioning and feedback as any time I think I have ever made a call to cover shorts since the thralls of early 2009. This is an important sentiment indicator.”


In hindsight, making the aggressive short covering call on September 12th of last year was the correct call.  Some might call it luck, but for us it was born out of our global macro process.  Now, arguably, we probably should have gotten even more aggressively long.  As always though, the first step in the stock market business is to not lose money.


Coming into 2012 we were as bullish as we’ve been in awhile.  One of our key 2012 macro themes was that the rate of global growth slowing would bottom.  In our macro models, marginal rates of change in growth are critical, but as critical is monetary policy, which influences growth.  On January 25th of 2012, the FOMC released the policy statement post their December meeting, with the key line being:


“In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”


So, in one fatal swoop, The Bernank extended the Federal Reserve’s depression level monetary policy out another year.  Monetary policy influences our outlook on inflation, which influences our outlook on growth and equity returns.  Hence, we reversed course following the FOMC policy statement noted above.  Now, maybe that’s Bad Macro, or maybe it’s smart macro.  The data suggests it’s the latter.


In the Chart of the Day, we’ve attached an analysis that looks at inflation versus the price to earnings ratio of U.S. equities from 1978 to 2008.  The r squared between CPI, the proxy for inflation, and P/E is very highly correlated at 0.76. As the curve demonstrates, inflation is bad for equities.  That’s not a guess, that’s a fact based on the data and underscores our shift in outlook post the FOMC statement in January.  Some call this mental flexibility, for us it is process. So far, by the way, we’ve been wrong on U.S. equities in the shorter term duration.  That said, fighting the Fed worked in 2011.


While I am on the topic of Julian Robertson this morning, I would like to give him credit for more than being one of the best money managers of our time and an incredible mentor of young money managers. I would also like to acknowledge his leadership in philanthropy.  As Albert Einstein said:


“The value of a man resides in what he gives and not in what he is capable of receiving.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now 1717 – 1761, 113.42 – 118.27, 1.31 – 1.33, 78.51 – 78.94, and 1330 – 1360, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


Bad Macro - EL Chart 2 9


Bad Macro - VP 2 9


TODAY’S S&P 500 SET-UP – February 23, 2012

As we look at today’s set up for the S&P 500, the range is 10 points or -0.34% downside to 1353 and 0.39% upside to 1363. 












  • ADVANCE/DECLINE LINE: -652 (-660) 
  • VOLUME: NYSE 729.05 (-8.64%)
  • VIX:  18.19 0.00% YTD PERFORMANCE: -22.26%
  • SPX PUT/CALL RATIO: 2.15 from 1.42 (51.41%)


  • TED SPREAD: 41.03
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 2.02 from 2.00
  • YIELD CURVE: 1.72 from 1.71

 MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Jobless Claims, week of Feb. 18, est. 355k (prior 348k)
  • 9:45am: Bloomberg Consumer Comfort, wk of Feb. 19 (prior -39.8)
  • 10am: House Price Index (M/m), Dec., est. 0.1% (prior 1.0%)
  • 10am: Freddie Mac 30-yr mortgage
  • 10:30am: EIA Natural Gas storage
  • 11am: DOE inventories
  • 11am: Kansas City Fed Manu., Feb., est. 9 (prior 7)
  • 1pm: U.S. to sell $29b 7-yr notes


    • Obama speaks on economy, rising oil prices at University of Miami, 2:30pm
    • Quinnipiac Univ. releases poll of American voters on economy, women’s health and military service, healthcare reform, 6am
    • National Economic Council Director Gene Sperling, FTC Chairman Jon Leibowitz speak at White House event on privacy, noon
    • House, Senate not in session
    • EU Commissioner Michel Barnier speaks at U.S. Chamber of
    • Commerce on financial services sector risks, 1pm
    • U.S., North Korean officials meet in Beijing


  • First USDA forecast of 2012-2013 crop season may predict largest corn crop since World War II
  • German business confidence rose more than economists forecast to a seven-month high in Feb.
  • New York Fed said to seek bids for more of the mortgage bonds assumed in rescue of AIG
  • Silver Lake sees buyout firms focusing in on makers of telecommunications and mobile-phone gear this year
  • Deutsche Telekom posts U.S. contract subscriber losses, forecasts lower 2012 profit
  • FDA panels vote on Chelsea Therapeutics’ Northera in neurogenic orthostatic hypotension, Forest Labs/Almirall’s aclidinium bromide in COPD
  • Google said it would support industry agreement to introduce a “do-not-track” button that will be embedded in Web browsers
  • Warner Music owner Len Blavatnik said to still pursue EMI recorded music unit
  • Apple holds first annual meeting since death of Steve Jobs


    • Sears Holdings (SHLD) 6 a.m., $0.78
    • EchoStar (SATS) 6 a.m., $(0.19)
    • MetroPCS Communications (PCS) 6 a.m., $0.16
    • Iron Mountain (IRM) 6 a.m., $0.29
    • DISH Network (DISH) 6 a.m., $0.61
    • Trina Solar (TSL) 6:15 a.m., $(0.43)
    • Hormel Foods (HRL) 6:30 a.m., $0.48
    • Loblaw (L CN) 7 a.m., C$0.66
    • Patterson Cos (PDCO) 7 a.m., $0.50
    • Kohl’s (KSS) 7 a.m., $1.80
    • American Tower (AMT) 7 a.m., $0.29
    • Plains Exploration & Production Co (PXP) 7:25 a.m., $0.36
    • Public Service Enterprise Group (PEG) 7:25 a.m., $0.48
    • Tim Hortons (THI CN) 7:30 a.m., C$0.62
    • Target (TGT) 7:30 a.m., $1.39
    • Omnicare (OCR) 7:30 a.m., $0.56
    • CMS Energy (CMS) 7:30 a.m., $0.15
    • Ameren (AEE) 7:42 a.m., $0.15
    • Liberty Media - Liberty Capital (LMCA) 8:30 a.m., $0.40
    • Liberty Interactive (LINTA) 8:30 a.m., $0.38
    • Denbury Resources (DNR) 8:30 a.m., $0.34
    • Safeway (SWY) 9 a.m., $0.64
    • WPX Energy (WPX) Pre-mkt
    • WebMD Health (WBMD) 4 p.m., $0.29
    • TiVo (TIVO) 4 p.m., $(0.19)
    • SBA Communications (SBAC) 4 p.m., $(0.23)
    • Gap (GPS) 4 p.m., $0.42
    • American International Group (AIG) 4 p.m., $0.56
    • Crocs (CROX) 4 p.m., $0.04
    • Molycorp (MCP) 4:01 p.m., $0.40
    • Marvell Technology Group (MRVL) 4:02 p.m., $0.17
    • Autodesk (ADSK) 4:02 p.m., $0.45
    • Live Nation Entertainment (LYV) 4:05 p.m., $(0.31)
    • Salesforce.com (CRM) 4:05 p.m., $0.40
    • SandRidge Energy (SD) 4:05 p.m., $(0.02)
    • Monster Beverage (MNST) 4:10 p.m., $0.37
    • KBR (KBR) 4:14 p.m., $0.64
    • Northeast Utilities (NU) 4:26 p.m., $0.69
    • HealthSouth (HLS) 4:30 p.m., $0.31
    • Westar Energy (WR) 5 p.m., $0.15
    • Public Storage (PSA) 5 p.m., $1.58
    • Magna International (MG CN) 5 p.m., $1.02
    • Ansys (ANSS) 5:03 p.m., $0.70
    • Iamgold (IMG CN) 5:15 p.m., $0.34



We were looking for a way to bridge the gap between what Inflation Expectations are doing (last price) and what partisan politicians are saying about oil prices this morning. In a globally interconnected marketplace of colliding factors, to call this rip to $124/barrel in oil prices simply a function of “Iran” is as simple does – un-American and uninspiring.

Multi-factor, Multi-Duration.

    1. Oil is up +13.3% in the last month
    2. Oil is up +160% in the last 3 years
    3. Oil is up +480% in the last 10 years 
  • Barrick’s Regent Sees Gold-Stock ‘Inflection Point’: Commodities
  • Gas Swings at 2-Year High as U.K. Flaws Exposed: Energy Markets
  • Brent Oil Rises to Nine-Month High on German Business Confidence
  • Copper Swings Between Gains, Losses on Oil Prices, Confidence
  • Wheat Declines as Global Stockpiles May Increase to a Record
  • Robusta Coffee Rises as Bets on Higher Prices Surge; Sugar Gains
  • Gold May Gain in London as Dollar’s Drop, Low Rates Spur Demand
  • Armajaro Cuts Cocoa Shortage Forecast by 50% on Port Deliveries
  • U.S. Eyes Record Corn Crop as Farmers Boost Acreage to 1944 High
  • Transocean Bonds Gain on Move to Avoid Junk: Corporate Finance
  • Aluminum Premiums Poised to Climb on Supply Outlook, CRU Says
  • Corn Imports by China Seen Increasing Sevenfold on Demand
  • Palm Oil Set to Rally Above $1,300 by Midyear, Coleman Says
  • Shell’s Cove Bid Starts Race for East African Gas Fields: Energy
  • BHP Record Bond Offering Taps Commodity Hunger: Australia Credit
  • Tin Exports From Indonesia in Quarter Seen Lowest Since 2010
  • Corn Futures in Dalian to Extend Decline: Technical Analysis 






















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CHART OF THE DAY: Politics and Prejudice


CHART OF THE DAY: Politics and Prejudice - Chart of the Day

Politics and Prejudice

“Politics and prejudice keep pushing their way into things.”

-Izzeldin Abuelaish


I’m often inspired by doers in this world. Instead of pandering to the political wind, they simply lead by example. Their respect is earned each and every day, not centrally allocated.


The aforementioned quote comes from a Palestinian doctor who was educated in Cairo and at Harvard. He practiced in both Saudi Arabia and Israel, and now lives in Canada. His story is called “I Shall Not Hate”, and I highly recommend reading it if you’re looking for cultural context in analyzing the Middle East.


The last decade has been a particularly disappointing period in this grinding conflict that keeps us apart. Our leaders bicker like children, breaking promises, behaving like bullies, keeping the kettle of trouble boiling. The people I talk to – patients, doctors, neighbors in Gaza, friends in Israel – are not like our leaders.” (I Shall Not Hate, page 121)


Until he mentions Gaza, you’d think he was writing about the 112th US Congress. But what is it about Iran or Illinois that keeps us from having a discussion about economic facts? Why are we wedded to Western Academic Dogmas gone bad? Why are we so partisan?


Unlike debating science and math (where there are actual answers to the questions), American economic opinions, strategies, and forecasts are heavily weighted to Politics and Prejudice – and massively underweight transparency, accountability, and trust.


Back to the Global Macro Grind


I was looking for a way to bridge the gap between what Inflation Expectations are doing (last price) and what partisan politicians are saying about oil prices this morning. In a globally interconnected marketplace of colliding factors, to call this rip to $124/barrel in oil prices simply a function of “Iran” is as simple does – un-American and uninspiring.


Multi-factor, Multi-Duration.

  1. Oil is up +11.7% in the last month
  2. Oil is up +193.4% in the last 3 years
  3. Oil is up +503.3% in the last 10 years 

This, of course, is what The Bernank calls The Deflation.


Iran is definitely a factor. But it’s certainly not the only factor. Having a dual mandate (monetary and fiscal policy) to debauch the Dollar puts the world’s reserve currency in a position where we are all subject to more volatility associated with “external shocks.”


If that’s not the case, why didn’t Oil go to $130 or $150 during the Reagan and/or Clinton years? There were plenty of Middle Eastern, Russian, and US supply scares over the course of the 1980s and 1990s, weren’t there?


Ah, but there was also a global expectation for Strong Dollar Policies from both the Reagan and Clinton Administrations: 

  1. Monetarily: Reagan was Strong Dollar (Volcker raising interest rates and the rate of return on American Savings, again, and again)
  2. Fiscally: Clinton was Strong Dollar (Balanced Budget Act 1997 and the only President since Truman to run 3 consecutive surpluses) 

Got Politics and Prejudice?


Oh there is plenty folks. But the beauty of being Canadian this morning is not only that we have Steven Harper instead of Santorum, but we can sit back and not be Republican or Democrat about this. Economic policy context here is critical, because when it comes to the last decade of Bush/Obama, both of these Presidents are much more like Nixon/Carter than anything else – Keynesians.




Abuelaish says one thing they haven’t tried in the Middle East is empowering women to make decisions. I like that, because the American men running economic policy couldn’t be worse. And by the way, the only major head of State to be Strong Currency (both fiscally and monetarily) in the last 40 years was Margaret Thatcher. If I was Mitt Romney, I’d be doing the required Hayekian reading on that, fast.


In other news: 

  1. Japan – Former BOJ deputy chief Muto says the Japanese fiscal and monetary situation has reached a “trigger point”
  2. China – Premier Wen is whispering about cutting China’s GDP run rate below 8% at the National People’s Congress (March 5th)
  3. Europe – Economic Stagflation (rising inflation, slowing growth) is back in the headlines instead of Greece 

Maybe we should blame Iran (or Canada?) for Big Government Policies to inflate slowing global growth again too?


Macro Math on what those big 3 represent as a % of total Global GDP: 

  1. Japan = 9.3%
  2. China = 11.1%
  3. European Union = 28.1% 

So, that’s only 48.4% of the world’s economic output. I guess it’s a really good thing that Bernanke sees no inflation slowing real (inflation adjusted) economic growth in America. Sadly, Politics and Prejudice have made us willfully blind.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $119.45-123.86, $79.01-79.47, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Politics and Prejudice - Chart of the Day


Politics and Prejudice - Virtual Portfolio

KSS: Resistance is not Futile

Don't give in to temptation to support this name on the guide-down. 


No major surprises in the KSS print. Guidance was well below the Street, but about in line with our model. We like KSS realistic approach to 2013 – a year that will be marred by price competition from JCP, TGT, AMZN, SHLD, M and WMT. 


Here are two major factors to consider...

1.  The base business simply is not growing, and this was in a decent year overall for he industry. 

  • E-commerce reached $1bn in revs growing at 39% for the year, which contributed 1.5% to total top-line growth accounting for 70% of sales growth.
  • KSS’ total revenue growth in F11 was 2.2%.
  • If we assume e-commerce grows at a similar rate this year it would account for 2% total top-line growth; Guidance calls for 4.5% growth overall.
  • Backing into new store productivity contributions for Q4, new store growth accounted for 2% total growth this past year. 
  • That would imply that e-com and new store growth = +3.5% vs. total at +2.2% = core contraction

2. The sales/inventory spread (see our SIGMA) eroded the most in over four years. That said, we did not see a capitulation in Gross Margins - the combination of which is very GM-bearish. 


Resist temptation to buy on a sell off here. 


KSS: Resistance is not Futile - KSS SIGMA



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