PFCB – “Hope is not a process” – but it’s something

If PFCB did not go down today, it’s not likely to go much lower unless sales begin to look like they did in December. As we sit here today, PFCB is hopeful that same-store sales trends will be worse in 1H09 than in 2H09. When questioned about its forecast for a 2H improvement, management stated that it is based primarily on “internal optimism” (again hopeful!) that the environment will improve from a macro perspective. Although we always say at Research Edge that “hope is not a good investment process,” PFCB has taken the appropriate steps to proactively manage for this challenging environment by significantly cutting unit growth and capital spending (down nearly 43% YOY in 2008 and expected to be down over another 50% in 2009). Additionally, the company is extremely focused on managing costs more efficiently, particularly at its Pei Wei concept. That being said, I would agree with management’s comment that if and when there is some relief to the consumer, PCFB would share in the benefit.

Management also stated that should sales trends remain at such depressed levels (though sales trends to date are ahead of the company’s internal forecasts), that investors should not expect 2009 margin performance to fare as well as it did in 2008. I think this is an important point for all full-service restaurants. In 2008, companies worked to eliminate costs wherever possible in an attempt to protect margins. Most companies have already slowed unit growth significantly and have cut the fat out of their systems in order to mitigate the margin declines associated with sales deleverage in 2008. There is not much more these companies can do to benefit margins on a YOY basis outside of driving sales higher.


Mr. Marriott: BRING DOWN THAT CAPITAL SPENDING! I suppose it’s not as important as Reagan’s speech to Gorbachev but it is important to MAR shareholders.

MAR spent around $1 billion in total capex in 2008. The capex details are broken down in the table below. This is an insane amount of money for a company with a very attractive fee based business model that should not be this capital intensive. As my colleague, Anna Massion, said to me recently, “no wonder they get such a s****y multiple”. Yes, she has a potty mouth (her words), but she is also very smart. For 2009, MAR has already guided to a “cut” down to $700-800 million.

We think capex could be cut in half. Not only is such a cut possible, we think they will cut, maybe not half but certainly by $200-300 million. Timeshare looks like the most likely segment to be thrown on the chopping block. At their current sales velocity, MAR has over 4 years of timeshare inventory on hand versus a typical duration of closer to 2 years. This is money already spent. They will need to use their balance sheet to finance the sales of timeshare, since they are probably not tapping the securitization market any time soon, but our guess of what MAR needs to spend on timeshare is closer to $150MM in 2009. They don’t need to, nor should they develop anything aside from completing the projects that are already in sale.

New hotels are not being developed, financed, etc. Look for MAR’s equity and mezzanine investments to dwindle. Capex and Acquisitions of over $300 million in 2008 is puzzling to us. We will get more clarity on this item tomorrow but it surely looks like another chopping block candidate.

So the cash flow situation should, and probably will look a lot better. Where do we stand on the fundamentals? The Street is projecting 2009 adjusted EBITDA of about $1 billion. Thank God for HOT’s earnings release since it seems that sell side estimates are not that stale, for a change. We still think the EBITDA guidance should come down 5-10% but that is probably not out of line with buy side expectations. Remember, MAR doesn’t have the same susceptibility to RevPAR changes as do hotel owners. The fee based model limits the negative flow through. Additionally, MAR will not face the same FX headwinds as HOT.

We are certainly not making a top line call on business trends improving. With less than awful guidance tomorrow and the potential catalyst of a significant capex cut, however, MAR certainly looks a lot more positive than HOT did heading to its earnings release.

Here is where it all went


If you read our work regularly over the past year, you know we’ve been long Australia on several occasions. Under the firm management of Glenn Stevens, the Reserve Bank of Australia managed to keep the Australian economy under control during the unprecedented run up in the cost of base metals and energy commodities in 2007/2008. As a result, the Australians have been able to enjoy a softer landing with their extra rate cushion which has left plenty of room to cut. Now that the benchmark rate has been slashed to a 45 year low of 3.25% however, the reality of Australia’s dependence on external demand for commodities has sunk in; the projections in yesterday’s National Bank report were for a contraction of 0.25% in ‘09 with growth turning positive finally in 2010. Also released yesterday was the NAB business confidence survey (charted below) which, not surprisingly, registered levels that are at an all time low.

Still there are glimmers of hope on the horizon. As the reflation theme develops in the coming months, the land down under may be among the first to reap the benefits. In fact there are signs that it may have already begun. The Baltic Dry sub Index for the crossing from Western Australia to Beilun/Baoshan, a heavy traffic area for iron ore and other basic materials, has increased by almost 70% YTD –over 65% in this month alone (compared with a 6.6% decline in the ASX all ordinaries YTD). We will be keeping our eye on Australia: when sentiment becomes so overwhelmingly negative, positive data points on the margin can sometimes have a major impact.

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The coverage of this morning’s balance of trade data has produced screaming negative headlines in the media. To be sure, the rapid decline in exports and even steeper import contraction creates a conundrum for world trade; there is real pain in the data, but there are also signs of resilience in China’s heavy industrial sector. Here is my quick read on the import portion of the equation:


With USD measured imports down 29% for the month and 43% year-over-year there is plenty of bad news to go around, as evidenced by the regional/national breakout (see table).

When considering this information as an indication of overall Chinese demand it is critical however to run the numbers.


Ultimately, tracking trade data in USD can partially mask the real underlying situation. As an example, considers the tonnage data for Iron ore imports in January (see table).

At 32.65 million metric tons, imports declined by only 5.4% for the month, with total tonnage remaining in excess of 30 million for every month since October 2007 (see chart below). Clearly imports of basic materials have declined, but the data for raw materials like ore suggest that purchasing agents and mill operators are still feeling demand while anticipating the impact of the stimulus programs for Q2.

There is no better illustration of Chinese appetite than yesterday’s news of a potential $20 billion investment into Rio Tinto by Chinalco, the largest Chinese aluminum producer. Yesterday we touched on some on other data points that continue to support our conviction in our Reflation/Chinese recovery themes for 2009: Coal imports, a minor but fascinating measure and the Baltic Dry sub index for Western Australia/China routes. These positives are underscored by today’s news.

We remain bullish on the waking Ox and its appetite for raw materials in the coming months. As always we will keep our eye focused on every data point as it arrives, continually testing our thesis.

Andrew Barber

Jimmy and Timmy

“Never do anything against conscience even if the state demands it.”
-Albert Einstein

Consensus “stock pickers” didn’t do macro during the 25-year bull market, and now that’s all they talk about. At least we, as an investment community, are evolving – Darwin and Einstein would be proud.

Jim Cramer is one of those people who is now proclaiming his macro mystery of faith. Last night while I was driving home I heard him going off on how everyone “is throwing Tim Geithner under the bus...” and that he isn’t going to – he likes Geithner. For the’s accountability record, please let Cramerica’s “call” on Geithner be known.

Jimmy, hate to break it to you big man, but I’ll take the other side of the Timmy trade. For the transparency purposes that the likes of Cramer and others are all of a sudden giving lip service to, I issued a note to our macro clients shorting Geithner and the Dow Jones Industrial Index at 10:19AM yesterday morning (see  for the Hedgeye Portfolio). Having had Timmy’s prepared 11AM speech notes in hand, this actually wasn’t a very difficult call to make, provided that you had a proactively prepared macro investment process to have put the Timmy plan in context.

Context is much different than contacts. Some of the said hedge fund masters of yesteryear, who don’t have a macro process (like Jimmy), rely heavily on their “contacts” in the business telling them what to do and when. In this brave new world of globally interconnected markets, that doesn’t always work. It’s the equivalent of having to have someone turn on your high beams and wipers for you rather than flipping the switch yourself.

Following the leader isn’t actually all that bad – that’s if you’re following the right one. Cramer himself actually finds a way to get my intraday investment notes (without paying for them) – but heh, that’s the way some people in this business do business. While it’s sad, it is efficient. Eventually, the right call makes the rounds.

“Making the call” in this business is what differentiates the winners and the losers. That’s why this game is such a great one. Provided that you don’t play by the rules of the Blackstone “marked to model”  ideology, every day you can measure yourself, on a marked to market basis, versus the Jimmy’s of the world.

Jimmy has, of course, had his own issues with transparency, accountability, and trust. He and General Electric are in the midst of a cat fight with Rupert Murdoch’s Barron’s these days, and the poor guy is taking it on the chin. He’s an entertainer, not a portfolio manager – give the man a break! When it comes to his “call” on Timmy, however, what qualifies his opinion? I actually have no idea – maybe he is right. But I can tell you this – where I come from at least, being able to tell whether someone is trustworthy or not is not a life lesson learned on Wall Street. In the real world, we call this leadership quality sound judgment.

My judgment call on Timmy is not unlike that I have always had on Jimmy – I just don’t trust him. Yes, that’s a personal call… and sometimes my readers think I am being too hard on people… but guess what, calling someone out on the mat is actually ok in the real world, especially if you are going to be right. Whether its Jimmy, Timmy, or Billy (Ackman), it’s all one and the same – it’s called risk management.

Clearly, President Obama had someone proactively prep Timmy with media training (he spoke slow-ly… and arti-cu-la-ted his ev-e-ry con-so-nant), but forgot the content part. While the three parts to Timmy’s speech were spoken to cl-ear-ly… they lacked cl-a-ri-ty…

When it comes to delivering on Wall Street’s expectations, one needs to be crystal clear. Now that I have put myself in the fishbowl taking Jimmy and Timmy to task, here is what I read into the three point plan:

1.      Stress Tests – this was a way for Timmy to dance around what he should have said explicitly to the bankers who receive TARP moneys. If you receive bailout moneys, there will be a string attached – it is called re-regulation. There will be less bailout moneys to go to public banking companies, and as a result, you either comply, or you fail.

2.      Expanding the TALF (Term Auction Lending Facility) – this has been signaled by Larry Summers and the Rubinites for weeks. The number of recipients of government support is going to expand alongside the size of the free lunch. Instead of $200B, this number is closer to a tr-ee-lion do-llar-z… and the duration by which the government is going to get it into the hands of the people who are shameless enough to take it is being pushed out.

3.      Establishing a PPIF (Public Private Investment Fund) – this was new, but again, rather than say it explicitly, Timmy was as coy as he looks. I read this as team Obama leaning more to the side of marking to market (which Blankfein and Wasserstein support) versus marking to model (Schwarzman and Fuld).  Everything has a clearing price, indeed.

When it’s all said and done, I think the conclusions here are much more straightforward than the plan that Jimmy officially now supports: public companies will fail, survivors will be regulated, and the socialization of the United States of America will expand.

I didn’t need to have one of Jimmy’s “contacts” tell me what to do as I was listening to all of this. I have a process that’s my own, and I made the call. No, I am not always right… but I am accountable to the time stamp on every call that I make. As our markets revisit the darkness of trust in our financial system lost, all I have left is hope. Hope is what I kiss my son and wife’s forehead goodnight with in this great country, but unfortunately it’s not an investment process.

Jimmy and Timmy, I have been blessed to live in a country where I don’t have to “do anything against conscience even if the state demands it.” The days of old boy network “contacts” trumping repeatable investment processes are over. It’s time for The New Reality to take hold. President Obama, our expectation is that you uphold these principles of Transparency, Accountability, and Trust by which you now speak.

I, like many Canadians and Americans, am protecting my family’s cash. I have a 76% position in cash. I am short the Dow, and I have an immediate term downside target for the SP500 of 809.

God Speed out there today. This is going to be a rocky ride,

Jimmy and Timmy - etfs021109


News flash: ASCA, BYD, ISLE, LVS, MGM, and PNK have been added to the XLF. Just kidding of course, but the stocks sure seem to be trading that way. Of course, this is a fairly reasonable outcome. Gaming operators are one of the most financially leveraged sectors out there.

The difference, however, between the gaming operators and some of these financial companies is the gaming operators have hard assets that generate cash flow and are easy to value, and their business models are sustainable with high barriers to entry. The surviving gamers, whose debt doesn’t kill them, will be worth significantly more than where they trade, in my opinion. Pick the survivors and there is a lot of money to be made.

If you believe the financials remain toxic as our Chief Investment Officer Keith McCullough believes, gaming stocks could be a nice hedge to a financials short position when the inevitable short squeeze hits. As can be seen in the following table, the correlation between gaming operators and the XLF was higher than that between the gamers and the S&P over the past two years.

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