The Economic Data calendar for the week of the 10th of September through the 14th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




Takeaway: China’s “stimulus” package really isn’t all that stimulating when analyzed in greater context.



  • From our purview, there are a number of things that are worrisome with China’s recent economic stimulus announcement.
  • Among other constraints, the size and scope of the latest measures are hardly large enough to substantially reflate Chinese economic growth over the intermediate term.
  • Moreover, Chinese policymakers are unlikely to pursue any fiscal or monetary policies with enough firepower to meaningfully inflect the slope of Chinese growth over the intermediate term – absent a precipitous decline in global growth.


Overnight, China’s benchmark equity index, the Shanghai Composite, closed up a +3.7% – its largest day/day gain since JAN 17 on widespread reports that Beijing had fired the first rounds of its [pending] economic stimulus “bazooka”. The infrastructure investment initiatives, which were allegedly announced via the National Development and Reform Commission (though, suspiciously, nowhere to be found on their website) range from 25 light rail/subway projects valued at CNY800 billion ($126B) to 55 total infrastructure projects (some previously announced) valued at CNY1 trillion ($160B).


From our purview, there are a number of things that are worrisome with this announcement:


  • Explicit timelines for project implementation did not accompany the announcement(s) and various sources were quoted in financial media articles as suggesting the projects would range from 2H12-2018 to four years on average, per project.
  • While we certainly aren’t questioning the Chinese government’s ability to finance itself, it would be nice to see concrete plans for fundraising. While trending in the right direction in recent quarters (i.e. down), more local government financing is certainly not a positive as it relates to the health of the Chinese banking system, given the obvious risks associated with one of their main sources of income (i.e. land sales).
  • Since 2008, the Chinese economy has grown by +50.1% on a nominal basis to CNY47.2 trillion (full-year 2011), meaning that the high-end estimate of CNY1 trillion for the stimulus measures is approximately 2% of the total Chinese economy. Compared to the CNY4 trillion stimulus at the end of 2008, which was 12.7% of nominal GDP then, and also concentrated in two years (2009-10), the latest announcement is a far cry from anything dramatic enough to meaningfully reflate Chinese economic growth.


The latter point has long been our research view on China’s POLICY outlook, specifically in that Chinese policymakers are unlikely to pursue any fiscal or monetary policies with enough firepower to meaningfully inflect the slope of Chinese growth over the intermediate term – absent a precipitous decline in global growth. More importantly, we continue to hold this view in the face of a divergent consensus outlook for Chinese policy, as our predictive-tracking algorithms suggest A) the slope of Chinese economic growth appears to be leveling off, allowing policymakers to achieve their +7.5% real GDP growth target for 2012; and B) inflation is likely to accelerate in 2H12. Both severely depress the need and scope for introducing a major economic stimulus package over the intermediate term, which is what we think those who are bearish on the Chinese economy are most afraid of.




For more details on why we initially arrived at the aforementioned conclusion, refer to the following research notes:


  • CHINA’S RATE CUT IS LIKELY A BAD SIGN OF WHAT LIES AHEAD (6/7): We don’t see the early innings of this Chinese rate cut cycle as a signal to get bullish on China’s economy or equity market at the current juncture. Moreover, we do not find it prudent for investors to increase their asset allocation exposure to commodities here.
  • CHINESE GROWTH: STICKING TO THE CENTRAL PLAN (7/13): We maintain conviction in our view that Chinese economic growth is not poised to meaningfully inflect over the intermediate term. Furthermore, we can’t stress how much the late-year transition in leadership or the growing official realization that the 2008-09 stimulus package and central plan (i.e. state-directed lending) contributed heavily to a rapid and potentially unhealthy expansion in credit (+96.6% since the end of 2008) may slow Chinese policymakers’ fiscal/regulatory response [if any] to an incremental deterioration in economic growth. Remember, Chinese banks have yet to see a material deterioration in credit quality (the industry-wide NPL ratio is at a measly 0.9%), so it’s not unreasonable to believe that Chinese policymakers could be saving their “bullets” for a potentially more worthy cause than a purposefully-engineered slowdown in Real GDP growth to +10bps above their official 2012 “target” of +7.5% (announced in MAR).
  • PONDERING CHINESE GROWTH PART II (7/17): Contrary to consensus speculation, we are of the view that Chinese policymakers are likely not readying a stimulus package to be announced and administered over the intermediate term that would be substantial enough to meaningfully inflect the slope of Chinese economic growth. As such, it would be prudent to fade any incremental Chinese stimulus rallies for the time being.


In summary, it does not appear to us as Beijing is willing to unleash the “bazooka” at the current juncture, as this latest announcement is somewhere between “stimulus-light” and “business as usual” for China’s state-run economy. The timing of the ECB announcement yesterday and the FOMC decision next week probably provided a fair amount of cover for sell-siders to perpetuate the NDRC’s announcement as part of their “globally coordinated easing” storytelling. In reality, however, the package really isn’t all that stimulating when analyzed in greater context. For now at least, Chinese stocks agree with our fundamental conclusions:




Have a great weekend,


Darius Dale

Senior Analyst


Takeaway: Slowing employment growth among younger demographics could imply decelerating trends at QSR $MCD $BKW $WEN $CMG $JACK

Employment statistics released this morning by the Bureau of Labor Statistics were mixed from a restaurant industry perspective.  The hiring data (released on a one month lag) indicates a growing divergence between full-service and limited-service employment growth in July.  The employment by age chart shows a sequential deceleration in employment growth from July to August.  


Employment by Age


Sequential Acceleration/Deceleration from July to August in employment growth:










55-64 YOA: FLAT


Takeaway: The deceleration in employment growth among younger cohorts may have slowed the growth in QSR same-restaurant sales during the month August.





Industry Hiring


The chart below shows that, as of July, full service restaurants continue to hire at a faster rate, versus last year, than limited service restaurants.  The Leisure & Hospitality employment data is released in step with the major headline data and so it gives us an idea of how August might look.  Given the close relationship between Leisure & Hospitality employment growth and full service employment growth, we would expect stabilization in that trend next month.  If we do not see that stabilization in full service employment trends in August and, at the same time, we see that Leisure & Hospitality decelerated into September, that would not be a bullish indicator for 3Q casual dining same-restaurant sales trends.


EMPLOYMENT PICTURE NOT GOOD - restaurant employment


EMPLOYMENT PICTURE NOT GOOD - leisure   hospitality



Howard Penney

Managing Director


Rory Green



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Here I Go Again: SP500 Levels, Refreshed

Takeaway: Growth Slowing will continue if commodities continue higher. Burning The Buck is a market trade, not an economic solution.



“Here I go again on my own, like a drifter I was born to walk alone…”


But I’ve made up my mind, and shorted SPY one more time. I’m shorting it for different reasons than I would have yesterday, but the growth/earnings bulls of March 2012 change their thesis every other week, so I won’t sweat that.


Growth Slowing will continue if commodities continue higher. Burning The Buck is a market trade, not an economic solution.


Here are the lines in my model that matter to me most:


  1. Immediate-term TRADE overbought = 1437
  2. Intermediate-term TREND support = 1419


In other words, that’s your new risk range and overbought is as overbought does. If we snap 1419, that’s going to open up a whole new host of risks that I will not be exposed to. So we’ll wait, watch, and deal with that if we need to then.


What would have me become your huckleberry on the bull side of equities (bear side of bonds)? Easy answer: Growth Accelerating.


And it’s easier to see that not happening today than it was in March.


Enjoy the weekend,



Keith R. McCullough
Chief Executive Officer


Here I Go Again: SP500 Levels, Refreshed - 1


Takeaway: $MCD's problems are not all macro. We will be looking for mgmt to address some company-specific issues before becoming more constructive

In January 2011, we published a Black Book outlining our concerns about McDonald’s direction as a company.  The beverage strategy, in particular, was something we saw as having negative implications for the stock over the intermediate-to-long-term.


At the time, we wrote that the much-vaunted McDonald’s “Plan-to-Win” strategy has always been centered on “better, not bigger.  Instead of building more restaurants, McDonald's increased profitability by squeezing more from its existing store base and from its franchisees. Over the past three years, however, the mantra has seemingly become beverages, not burgers.”


As the company has shifted its focus away from its core business, the restaurants’ have gradually become less operationally efficient.  Additionally, resources are spread more thinly across the company as the menu grows.  The core business, on a relative basis versus peer QSR burger concepts, suffers under this scenario.  While we cannot summarily state it as fact, it is possible that the company’s core business has been declining in the U.S. and, if true, this would support the idea that Five Guys, Shake Shack and other players in the category are taking share from McDonald’s.


As we changed our view, from positive to negative, on McDonald’s on 5/8/12, our conviction was that sales were slowing globally and, in the U.S., there was a dearth of new menu items to “comp the comps” versus the 2011 and 2010 beverage successes.  Almost exactly a year prior, on 5/9/11, we capitulated on our bearish view and accepted that changed facts, at that time, dictated a positive outlook for the company.  What we missed in 2011 was how much of a success beverages could be for a second year running.  In 2012, global growth slowing combined with the lack of new product momentum and an eroded value advantage versus the rest of the restaurant industry has clipped MCD’s wings.


The core tenets of our thesis has remained unchanged, however: the company needs to renew its focus on its core business.  The words of Jim Skinner come to mind.  He said, “We had lost our focus. We had taken our eyes off the fries."


A great article in QSR Magazine, written by former McDonald’s marketing executive Roy Bergold, discusses menu expansion and the impact it has on business and profitability.  In the article, titled, “Addition by Subtraction”, Bergold advocates the simple versus complex strategy and we believe his thoughts are highly salient for McDonald’s investors today.


Clearly, a significant component of MCD’s difficulty is rooted in the macroeconomic environment but there are some self-inflicted wounds, also.  In 2011, we were wary of the shift in focus from burgers to beverages and that is still the case today.  From here, for us to become more constructive on the long side of MCD, we will be looking for management to reverse course and simplify, rather than complicate, the menu so that the company can refocus on its core menu.  We are not expecting any such announcement soon, however, given that it would effectively be a mea culpa on the part of CEO Don Thompson, the man behind McCafé.  


August sales will be released on the 11th and we will have a note out in advance.  Sequentially, we are expecting a better result than July’s, but from there the outlook suggests a difficult top-line environment potentially through February 2013.


MCD: IT’S NOT ALL MACRO - mcd pod1


Howard Penney

Managing Director


Rory Green





Keynesian Mega Party







If you thought the party known as Keynesian central planning was coming to a close, you are sorely mistaken. Pop the champagne bottles, light the cigars and hand out the Quaaludes – we’re due for another round of easing any day now. The Federal Reserve has just seen the August jobs report (which missed expectations) and will have to go back  to printing more money and injecting it into the economy. It may not be pretty but hey, as long as we have drugged up, no volume rallies that push the S&P 500 as high as it can go, we’re groovy, right?




Ask yourself this question and then ponder for a minute what the correct answer is. Is it the US stock market or bond market? Is it German stocks or the EUROSTOXX 50? Is it the S&P 500 or the Russell 2000? Keith highlights some of these questions in this morning’s Early Look and we wonder where exactly the growth is. It’s like that Paula Cole song from the 1990s “Where Have All The Cowboys Gone?” Ask yourself: where has the growth in America gone?






Cash:                  UP


U.S. Equities:   DOWN


Int'l Equities:   DOWN   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“#EaseToPlease was just officially green-lighted ~ #QE3” -@TheKillir




“There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli




Unemployment fell from 8.3% to 8.1% for August.


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