CKR – Disappointing Numbers

The good news is that in period 1 Hardees’s same-store sales increased 3.2% vs. 1.6% last year. The bad news is that Carl's Jr.’s comparable sales decreased 3.6% vs. a 1.4% increase in the prior year. In the current environment discounting is the only way to generate incremental traffic and management has no intention of “trying to compete with free because, no matter what anyone says, you can't make that up on volume."

At the same time, management wants to blame rain in Southern California as the reason for the sluggish trends at the Carl’s Jr. concept. The fact is that rain may have had an impact on the current period sales trends, but that should not be mistaken for 5 months of decelerating trends at Carl’s Jr.

It’s hard to single out a reason why Carl’s Jr. is slipping, but value for the money is going to be the one that appears at the top of the list. Carl’s Jr. has always been more expensive than any of the other “big three” competitors and the focus on value by its competition is a major issue for the company, particularly in the current environment. Holding the line on value becomes harder to do as the decline in traffic trends begin to accelerate.

Trading at 4.3x NTM EV/EBITDA, CKR is one of the cheapest stocks we follow and deservedly so. In addition to the core concept losing market share to the “big three,” management at CKE is one of the least shareholder-friendly management teams in the restaurant industry.


Copper futures are reached 3-month highs today as the anticipation of increased infrastructure spending in new Chinese stimulus measures. We have been watching copper closely since the beginning of the year as the signals of increasing demand have become more pronounced. For those of you who listened to our morning call yesterday, we indicated that copper had broken out quantitatively and we saw serious follow through today.

As we position ourselves for the re-flation trade it’s important to keep in mind that the increased buying by Chinese industrials that we noted this morning in our PMI post is just the tip of the iceberg. Although it will be months before ground is broken on the major projects in the interior and there is a lot that can happen between now and then, but the Chinese government has already signaled a willingness to hold hard assets in lieu of Treasuries and these infrastructure projects will need much in the way of basic materials. If things play out in China like we suspect, this could only be the beginning of the move for the good Dr. Copper.

Daryl G. Jones
Managing Director

Andrew Barber


The Isle of Capri conference call was the first time a casino company discussed lowering “pricing” on slot play. As we noted in our 07/18/08 note, “I’LL HAVE A SLOT MACHINE, HOLD THE WINNINGS”, hold percentage has been steadily increasing for years. Slot “tightening” and game mix shift toward video and penny slots were the main culprits. Effectively, consumers have received fewer and fewer payouts for their dollars wagered. Maybe that’s the price for higher entertainment value.

The charts below show the slot hold percentage trends over time for the Las Vegas Strip, Atlantic City, and Missouri. Missouri is used as a proxy for the regional markets due to readily available data in that state. Slot hold percentage in Las Vegas and AC experienced similar increases. Pricing power in Missouri was much greater, no doubt due to the limited license nature of that market which limits competition. With the exception of Mississippi (unlimited licenses), the other regional markets generated similar increases in hold percentage to Missouri.

I’m not sure whether ISLE’s decision to lower the slot hold percentage in certain markets represents an industry wide cut. However, it is a signal that “pricing” has gone up for too long and has probably peaked and the economy may keep the payout ratio in check.

This is a trend that investors should follow closely. Depending on the tax rate in the jurisdiction, flow through rates on a change in hold percentage can run from 50-90%. To show you the materiality of this issue, take a look at the Strip over the past 15 years. The hold percentage increased from 5.4% to 7.0% over that time. The 160 basis point improvement on 2008 slot volume represents about $650-700 million in profits to the Strip.

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The ISM report for February arrived above consensus estimates, but at levels that were far from positive. The business conditions index, derived from surveys of purchasing and supply executives, declined for the fifth consecutive month, registering at 41.6 versus January’s 42.9. The price index declined for the fourth month in a row after the previous 65 consecutive months of increases while the new orders and employment indices also registered at negative levels.

The data, although grim, is not without some positives. It is interesting to note that the only industry in which surveyed respondents reported an increase in all three categories of prices paid, employment and new orders was Real Estate, where managers also reported decreased inventories for the month. This data appears at first blush to support the thesis spelled out in Howard Penney’s Feb. 24 post on the decelerating rate of declines in home sales; that the real estate market could be close to a bottom.

We will keep our eye on manager survey data as it arrives, constantly testing each investment thesis.

Andrew Barber


Shipping data seems to confirm this heavy industry bias is purchasing patterns. Baltic shipping indices have shown significant improvement YTD overall, but on a % basis the western Australian route has outperformed the broader freight indices (For the purpose of comparison note that the W. Australian route is a single component of the broader indices and, as such, inherently more volatile), which also supports our fundamental thesis on base metal reflation and Australian equities as a component in the Chinese recovery theme.

Premier Wen Jiabao will announce new stimulus in his annual address tomorrow, with expectation running high that the new measures announced will fulfill the politburo pledge of a “massive” increase. All the cards on the table are in the hands of Beijing at this point, so the speech will be the sole focus of global markets as investors continue to grope for a bottom.

We remain long Chinese equities via CAF and retain a bullish bias on both Australian equities (we sold our EWA this morning to book a gain) and base metals like copper. We are keeping our plow firmly hitched to the OX as long as all available data continues to support our thesis.

Andrew Barber

Obama's Bottom?

"What you're now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal"
-Barack Obama, March 3rd, 2009

The best part about Obama making his first real "call" on financial markets yesterday was the predictable reaction of most people in our industry to it...

No, this is not a political statement. Yes, this is another point that needs to be made on the behavioral side of economics. Wall Street teaches itself memes... then the manic media follows its embedded mimetic desire, copying those memes ... then we find ourselves with proactively predictable behavior...

Whether it was shorting gold at $999/oz or calling out the predictable reaction that a President shouldn't be able to call markets, it's all one and the same -picking off the thundering herd isn't magic folks - anyone who isn't part of the daisy train can see this quite clearly - it's called common sense.

From the Washington Post to Fast Money, the stock market's entertainers immediately lined up Obama's market comments as something that the community organizer is just not equipped to do. It's actually quite hilarious to see these very people who were buying into the SP500, say +55% higher, question the man's entry point ... with a straight face.

Let me be clear, I don't think the President of the USA should make a habit making stock market calls. But neither do I think 95% of those market pundits and money managers alike who have swallowed their own "invest for the long run" tongues in the last 18 months should either. At the end of the day, he or she who actually makes the "bottom is in" call, on the day that the US market bottoms, will be looked back on by historians not as a politician or pundit, but as that person who was right.

Obama didn't actually call for a bottom. But, for the sake of transparency and accountability, let's assume that his aforementioned quote inspires one to believe that he thinks the SP500 down -23% for 2009 to-date is a "good deal." Let's time stamp that and see how the man does. Isn't he allowed to be in this game? Or is this a game that's only allowed to be played by our financial system's wizards?

Don't forget that he Obama has both a YTD low and the low print since 1992 in hand right now - there are a lot of you who are reading this, including me, who have a higher price than that...

I bought the SP500 +2.5% higher than Obama (on the 715 line) and I bought the Nasdaq a little closer to his time stamp. I would love to see all of those brave souls out there who call themselves "strategists" and Investment Chief of Herd Island give us their time stamps, real time, daily... That would make for some really exciting journalism!

The SP500 was down another -0.64% yesterday so I added to my exposure to US Equities, taking my Asset Allocation Model up to 22% in the USA versus the 9% I had allocated in the US as of Monday morning. Immediate term bottoms are processes, not points... so when prices are lower than my entry point, I buy more. Buy low, you know... like the community organizer said!

When I started buying exposure to Chinese stocks in November of last year, China's stock market had taken a -70% swan dive from its prior peak. When I started buying crude oil (in the $35-38/barrel range) the peak-to-trough decline was even steeper. Now China is up almost +30% from those lows, and the price of West Texas crude oil is +20% from the lows where the Thundering Herd dude at Merrill slapped his oil is "going away" price target on it...

This morning, are US stock market futures indicated up because Obama looks to be calling for a bottom, or because those who sold China's bottom are reminding us that they need to cover their shorts? Is the USA up because China is buying oil? Or is she up because a guy in Omaha called a guy in China and told him to stop buying the bubble in Treasuries, and buy into the community organizer's call?

All of this conjecture is as ridiculous as the notion that only certain people in this world are equipped to be "financial advisors" who can "make the call." The New Reality is that anyone with an internet connection and a line to the daisy train at CNBC can - including one, Barack Obama.

I have a 6% Allocation to International Equities, and half of that is in China via the CAF closed end fund. China, unlike the USA, continues to own her own liquidity and destiny. Two TRILLION dollars in cash reserves on a balance sheet has it's perks, and China's Premier, Wen Jiabao, is going to be "making a call" of his own on the Chinese stock market at tomorrow's Chinese equivalent of the State of the Union address...

I know, I know... Presidents and Premiers aren't supposed to be able to "call markets." But guess what? They both just did!

Oh, and by the way, Chinese PMI (manufacturing) came in much stronger than the herd expected last night (49 in Feb vs. 45 in Jan). We have been calling for a sequential acceleration in China in Q1 versus her November lows - and much to the chagrin of the China bears, we're getting one...

Chinese stocks had a huge session overnight, closing up another +6.1%, taking the Shanghai Stock Exchange Index to +20.8% for 2009 to-date. I am on the tape, long both USA and China right here and now, alongside Obama, Jiabao, and my investment process. I see another +12% of immediate term upside in the CAF from yesterday's close, and I have an upside target in the SP500 that's +7% higher from Obama's Bottom at 696. Game on.

Best of luck out there today.



QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on a down day on Monday.

EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

SPY - SPDR S&P500- We bought the etf perhaps a smidgen early with the S&P500 at 715, yet will take it at a discount.  The market is also close to three standard deviations oversold.

CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +13.75% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

GLD - SPDR Gold- We bought gold last Thursday with the S&P500 in the red and gold down. We believe gold will re-find its bullish trend.

TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.


LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

SHY -iShares 1-3 Year Treasury Bonds- On Thursday of last week we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.2517. The USD is up versus the Yen at 99.3350 and down versus the Pound at $1.4090 as of 6am today.

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