Korea: Damned If They Do, Damned If They Don't...

While other Economies face the threat of deflation, South Korea faces a rate dilemma driven by devaluation

The Bank of Korea (BOK) reported Monday that import prices grew 3.91% in February M/M, the first monthly gain since October when prices increased 4.1%. On a year-over-year basis, the increase in February registered at 18.03%, up from January’s 16.7%.

The weakness in the won is driving this import cost pressure. In 2008 the won declined 25.7% against the dollar, with the slide continuing into 2009. Despite the Won rally coming out of this weekend’s G20 meeting the expectation must be that import prices will continue to increase into March, driving consumer prices higher. CPI rose in February increasing 4.1% Y/Y, up from a 3.7% gain in January.

The one bright spot in import data was raw materials, which decreased 5.5%, Y/Y, following a 3.5% decrease in January, as aggregate commodity prices have continued the downward trend from last summer’s highs. This is a critical data point for Korea, the fourth largest oil importer globally which imports 97% of its energy needs. The rising price levels for crude so far this month suggest that this silver lining may soon disappear in the face of reflation.

Last week the BOK Monetary Policy Committee decided to maintain the Base Rate at 2.0%, after 6 consecutive rate cuts totaling 325 bps from October to February. The committee cited weakening domestic and export demand as downside risks to economic growth and a moderating factor in the run up in consumer price inflation generated by the won depreciation. YTD the won has weakened nearly 13% against the dollar, the largest depreciation among the region’s major economies, which has interesting ramifications for Chinese exchange rate policy.

The question is which effect will dominate the politics of policy going forward, the rate of increase in inflation driven by the collapse of the won or the contraction of Korean economic growth, as income and consumer sentiment continue to fall. We have a negative bias on the South Korean equity market and will continue to seek tactical opportunities to short into strength.

Andrew Barber


In late November, I outlined my call that 2009 would be a better year for restaurant stocks (please refer to my November 30 post titled “Building a Case for Casual Dining in Early 2009”). Specifically, I highlighted five catalysts, including 1) lower gas prices, 2) a fiscal stimulus package, 3) reduced restaurant capacity, 4) a decline in commodity prices and 5) valuation. With these catalysts already starting to take hold, I am sticking with my call!

Throughout 2008, restaurant management teams repeatedly referred to the operating environment as the perfect storm as sales declined at the same time a majority of their input costs hit historical highs. These two factors alone crushed margins, particularly within the casual dining industry.

We have not yet seen an end to the pressure on restaurants’ top-line results, though according to Malcolm Knapp data, January casual dining trends were less bad than December. Commodity costs, however, should be less of a burden in 2009. Most management teams are expecting food cost increases to moderate on a year-over-year basis, largely in 2H09. As the table below shows, all but one of the most prevalent restaurant commodity inputs (chicken) are down on a year-over-year basis in 2009 (based on the average prices year-to-date in 2009 vs. 2008). And, the declines are rather significant, except for pork, which is essentially flat.

Higher gas prices hurt restaurant margins in 2008 from both a cost standpoint, as companies were forced to pay higher fuel surcharges, and from a revenue/demand perspective as higher gas prices deterred consumers from going out to eat. Although gas prices are up 20% year-to-date, they are still down over 40% on a year-over-year basis, which should benefit consumers and restaurant margins alike.

In addition to lower year-over-year commodity inflation, most restaurant management teams are now more prepared to cope with the current sales environment as they have pared back on new unit development and directed more focus to better managing costs. All of these factors combined should help mitigate the impact on margins from continued sales deleveraging. That being said, I would not expect to see any material improvement in margins until sales begin to improve.

On a number of different levels we are setting up to see some very bullish trends in 2H09. We have already established the commodity tailwind that most restaurant operators will see in 2H09. From a MACRO standpoint, the potential for the consumer to prevail, begging to feel “less bad” as we move through the summer is a real possibility. Like it or not, progress is being made to heal the country, especially as it relates to the health of the banking system. Whether it’s the stimulus package, bank bailouts or small business loans, the current administration is pressing ahead with a number of initiatives to restore consumer confidence. This is positive for restaurant stocks!

For the past three years, as the restaurant industry led the down turn in the economy, easy comparisons were meaningless. As we head into 3Q09 and 4Q09, the tailwind of easing commodity prices and a stronger consumer could lead to improving same-store sales and margin expansion. Easy comparisons will once again be investable.

US Housing Will Bottom In Q209'


Since the beginning of 2009, I have been very clear on my stance as it relates to the housing crisis - the worst of the housing crisis is behind us. I said in early January that housing could bottom (in terms of sequential price declines and inventory growth) in 2Q09. Forming a bottom in housing is a process, not a specific data point.

The bubble in residential real estate is the root cause for the problems we face today. Therefore, it is only fitting that residential real estate should become the leading indicator that the worst of times is over; or at the very least, that the bottom is near. Increased confidence in the real estate asset class will allow those assets, in addition to other asset classes (i.e. equities), to obtain higher prices and ultimately, a higher valuation.

Today we learned that housing starts in the U.S. surged in February from a record low number in January. February housing starts saw a 22% increase from January; the biggest jump since 1990. While we are not out of the woods, these numbers are a part of the bottoming process and provide some visibility that we may see housing starts reach a bottom in the 2Q09. At the very least, it should provide comfort that the end is near.

We understand that builders are facing record foreclosures that will keep prices down year-over-year for the balance of 2009. Importantly, we will see the deceleration in prices begin to slow, also in 2Q09.

Howard W. Penney
Managing Director

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Whether it’s the ferry service or some sort of visa easing, recent Mass Market visitation to the Venetian has been strong, potentially up over 10% from last year. There seems to be some speculation that Chinese officials have been more lenient letting people into Macau in recent weeks.

Macau and LVS still face the difficult credit comparisons in the Rolling Chip business for another couple of quarters. Any offset from the more profitable Mass Market segment would be welcome.

ANECDOTE: ‘The Hazardous Side of Sears’

First we see a cluster of insider sales at Sears in from mid December through last week – the greatest insider activity since a $120-$140 stock in 2005.

Then Sears discloses today the receipt of administrative subpoena from the Ventura County DA seeking information related to the handling of hazardous waste in Ventura County and the state of California.

Then for kickers, SHLD sends out the promo email below for 75-80% off apparel.

Sounds to me like Sears has a company-wide problem with getting rid waste.

Presidential Approval Down, Stock Market Up

On February 17th, 2009, we wrote the following in a note entitled, “Eye on Sentiment: Rasmussen Total Approval Index”, the following:

“The decline in the Presidential Approval Index is about the best leading indicator we can find for President Obama’s approval rating. It shows the broad shift of approval for President Obama as voters downshift from Strongly Approve to Approve and from Disapprove to Strongly Disapprove. To the extent that it matters, it is very likely that President Obama’s broad approval rating heads into the mid-50s in the coming months, if not lower, as these internals are showing a very negative trend.”

While we can’t make money on calling Presidential approval ratings (at least not directly), President Obama’s approval rating is now solidly in the mid-50s as we forecasted a month ago. Additionally, in this Sunday’s Rasmussen Report, the Presidential Approval Index (difference between Strongly Approve versus Strongly Disapprove) registered +6, which coincides with an all time high in Strongly Disapprove of 31% and an all time low in Strongly Approve of 37%. So even though the total approval rating hasn’t broken to new lows (it was at 56% Sunday and first hit 56% about 8 days ago), the internals continue to deteriorate, which directionally suggests that a new low in total approval will be set in the next month or so.

As we have written in the past, President Obama entered office as an extremely popular President and so it is not totally surprising that his approval ratings have come back down to earth, especially in light of the controversy over the stimulus package and the missteps as they relate to his appointments. If we break his numbers down even further, President Obama is, not surprisingly, most weak with his two weakest constituencies. Specifically:

• While 37% of both men and women Strongly Approve of the President’s performance, 36% of men Strongly Disapprove and only 27% of women do; and

• Along party lines, 66% of Democrats Strongly Approve and 54% Strongly Disapprove.
Interestingly, on March 5th the Rasmussen poll indicated that 72% of Democrats Strongly Approve of the President, so the largest shift in the last two weeks for President Obama has actually come from within his own party. This shift of Democratic approval, as our Healthcare Sector Head Tom Tobin noted, also coincides with President Obama striking a more business and market friendly tone in the past couple of weeks.

Absent an external event, like 9/11, which shot President Bush’s approval rating to record levels, it seems likely that President Obama’s ratings will continue to deteriorate. And from an investment perspective, this might just be a good thing. The market sold off after Obama was elected, after he was inaugurated, and after his major speech to Congress, and now is rallying despite his new lows in approval.

Admittedly, we misjudged Obama’s impact on the stock market. Rightfully, we compared President Obama to FDR in terms of entering office with very high approval, entering office during time of serious economic duress, and taking over from an extremely unpopular administration. In reality, while both Presidents did share these characteristics, the reaction of the stock market to both Presidents has been markedly different. In FDR’s first 100 days, the stock market was up ~50%. Conversely, so far the stock market is down ~5.5% since Obama’s inauguration.

Ironically, while declining Presidential approval might be negative for broad confidence, historically it has a very strong correlation for inverse movements in the stock market. In fact, Ned Davis Research did a study of data from 8/21/1959 to 3/31/2006 in which they looked at the weekly return in the stock market when the Gallup Presidential Approval Poll is above 65, between 50 and 65, and below 50. The results of the study are outlined in the table below:

The punch line is that in the weeks where the Presidential Approval rating is the lowest, the stock market performs the best, and with a sizeable margin at that. So while to some it may be counterintuitive, President Obama’s approval rating breaking lower in the coming weeks may actually be positive for the stock market.

Daryl G. Jones
Managing Director

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.