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DRI – LET EM RIP

DRI is going to report FY 2Q09 EPS on Friday and we don’t think things are as bad as people think. See our DRI post titled “DRI - Estimates May Have Gone Down Too Much” from November 26.

I just want to reiterate what I think could come out of the EPS call:

(1) Street consensus EPS numbers are too low for the company….
(2) Same-store sales trends are better than consensus (part of the reason why EPS estimates are too low).
(3) The company will have positive commentary about the cost side of the equation, especially seafood, chicken and wheat costs.
(4) Industry same-store sales trends in November, while still bad, are less bad than October.
(5) FY 2Q08 was such a disaster

We know that there will likely never be another national Casual Dining chain that can compete against Red Lobster or the Olive Garden. What is that worth? I bet more than 9x EPS….

USD Weakness: Thank You Goldman Sachs!

The good word from the big bird on the Street today is that “Goldman is going out negative on the US Dollar”… whether that is coming from their prop desk or their sell side desk is of little concern to me. Soon, they will probably be one and the same.

Regardless of the source, our holiday greetings go out to the global titans of reactivity. We’ve been making the USD short call for the last three weeks (proactively preparing our clients for the FOMC meeting), and it’s nice to get the free advertising. As a reminder, we had our critical “Trend” line support for the USD break a few days ago (see chart).

The US$ is down -11% in less than a month. This isn’t the etf for Kazakhstan… or is it? This is the world’s “reserve” currency chart – “Heli-Ben” and Hank support the house of Goldman’s message today – they always have.

“Re-flation” of the SP500 continues… and no one believes in it yet.
KM

Why Are Stocks Ripping Again? VIX, VIX, VIX...

We signaled this level on the VIX to our Tier 1 Macro clients on this morning’s 830AM daily macro call. The bullish “Trend” line of support for the VIX ends at 50.52. Any close below that line is very bullish for the US stock market.

Volatility collapsing in the face of accelerating volume (Tuesday’s US volume was +34% higher than Monday’s) and expanding breadth is not only a recipe for a short squeeze, but a rally that bull riders cannot afford to miss.

“Trend” in our macro model is much more important than “Trade” – the intermediate term trumps the immediate term, because that’s where the real money flows are. If this “Trend” line of Volatility breaks, you can be certain that asset allocators are going to dog pile back into American equities. Don’t forget, there is ZERO incentive to be in cash when rates on cash savings are negative (on a real basis).

I just refreshed my model and I’m moving my immediate term resistance line for the SP500 to 926.
KM

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Dry Heaves Ending?

Baltic Dry Index: Poking up its head

We have commented on the Baltic Dry Index in the past (“Shipping Capacity Available: on September 29th, 2008) and while many of the financial media’s talking heads are no longer focused on it given the dramatic decline of commodities and shipping stocks over the last few months (remember the Fast Money crew only talks about stocks that are going up!) We have noticed that the Dry Bulk Index is starting to poke up its head up.

There is probably no better gauge for global commerce than the Baltic Dry Index. The Index value is determined through a canvassing of brokers every day and asks how much it would cost to book various cargoes of raw materials on different major routes around the globe. As we stated in our post on September 29, 2008:

“Because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as a good economic indicator of future economic growth and production, termed a leading economic indicator because it predicts future economic activity.”

While in the longer term pricing for ship capacity is at least partially driven by supply and demand of ships, so an influx of new ships will negatively impact prices, in the short term a fluctuation in the Baltic Dry Index is a function of the demand, or lack thereof, for the transportation of raw materials.

On the margin, and that is where things happen, an increase in the Baltic Dry Index suggests that global economic activity is increasing even if from a low base.

Chinese equities anyone?

Daryl G. Jones
Managing Director

MGM: UPON FURTHER REVIEW

After scratching our heads about why MGM would take such a big tax hit to sell TI, we have dug a little deeper. We now believe MGM may be actively buying its deeply discounted bonds back in the open market. While such a strategy triggers another taxable event, it also allows the company to de-lever at the tax affected discount since they are retiring the bonds at par. Strangely, the credit facility and the recent $750 million note agreements place few restrictions on the company from buying back subordinated debt.

The TI transaction will not close until Q2 2009 but MGM maintains undrawn capacity on its revolver that can be used to buy back bonds currently. We’ve spent a lot of time analyzing this situation and there are many moving parts, but we estimate the company could buy back $600 million worth of bonds at 65 through Q2 2009 to escape breaching its leverage covenant. However, the covenant issue could still resurface again in Q3. For this reason, we think there is a decent probability MGM pursues yet another asset sale. Selling its 50% share of Borgata to BYD is high on our likelihood list.

So where does this leave MGM’s equity? Another asset sale would certainly be a near term positive as the company would buy more time through 2009. The perception of covenant/liquidity relief is a big positive for MGM’s equity. The stock is still down 85% on the year despite the recent sector move higher. The long-term problem is that MGM will still face covenant issues in 2010 and still must close on the asset sale. It is in the company’s best interest to enhance the stock price to raise equity. Look for another asset sale in the coming months and a subsequent equity raise. Land sales are also a de-leveraging opportunity although finding buyers has been a struggle.

These actions by MGM could renew focus on the sector. Transactions, activity in the bond market, and improved liquidity are probably good for the entire beaten down gaming sector, bonds included. The bulls may be in charge for a while in this space.


Revised to reflect repurchase of discounted debt

"C'mon Man!": Updated SP500 Levels...

After we made our Monday Night Football call to action, “Are You Ready For Some Rate Cuts?”, we had some great feedback from clients in our network – I think, primarily, because I finally stopped talking in knucklehead hockey speak.

Elevating my market strategy discussion to a higher place of intellect is always my goal – it makes my call more “institutional”, or so they say…

So let’s get academic and call this morning’s selloff for what it is, “C’mon Man!”

Seriously – we’re getting really serious here about buying stocks. So let’s use the NFL’s “C’mon man” slogan, like Keyshawn Johnson does in his You Tubing Sunday’s worst professional plays. The shorts are caught off-sides and the bulls need to get invested. If you’re running around out there pitching my 9-12 month old bear case, “C’mon Man!”

Our macro playbooks is charted below:
BUY zone is 867-889 in the SP500, and the SELL zone is .

Don’t fumble in the red zone; the guys from Monday Night Football and I are working on some You Tube technology for that.

Have fun out there,
KM

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