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Improvements In Housing

One of the most important metrics for the housing market is existing inventory of homes for sale. Existing inventory recently moved lower (a positive for the market) by 7.8% on a month-over-month basis for October and 21.9% on a year-over-year basis. Levels continue to tighten which helps improve price and rid the market of excess housing. The charts below showcase the current state of the housing market over various metrics.


Improvements In Housing - image003


Improvements In Housing - image002


Improvements In Housing - image004

Time To Regroup

Client Talking Points

The No Volume Rally

Despite volume being down -21% yesterday versus the November average, stocks decided it was time to load up on steroids and rip to the upside with the S&P 500 blowing past our TAIL line of support at 1364 and closing at 1386. A reminder that our risk range  is 1364-1401 with the latter number being a real test of confidence for the market. We’re still down -6% from the Bernanke Top (aka September 14 YTD high) so you could consider yesterday to be a short squeeze or whatever buzzword floats your boat. The truth of the matter is that our three top macro themes remain intact: Earnings are slowing, the commodity bubble is popping and the Keynesian Cliff remains a problem that has yet to be addressed properly.

Major Meltdown

Our #EarningsSlowing theme has really been a focal point for the market over the last month. We’ve seen big boys like FedEx (FDX) and Caterpillar (CAT) guide down and plenty of misses versus Street consensus. #OldWall thinks that things really aren’t all that bad and yet each day, we get bad news or data that you think would make them change their mind. After last week’s selling, you can’t help but wonder what the people who said that stocks were “cheap” were thinking.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“I like how Meg Whitman is blaming "fraud" on the disastrous Autonomy acquisition. More like complete $HPQ board & management incompetence” -@Contrahour


“Skeptical scrutiny is the means, in both science and religion, by which deep insights can be winnowed from deep nonsense.” -Carl Sagan


China Foreign Direct Investment (FDI) remains down -3.5% year-over-year through October.


The Macau Metro Monitor, November 20, 2012




The Macau govt will draft laws to regulate the location, features, rules and operations of gaming venues, in an attempt to resolve gaming related problems, such as removing slot machines venues away from the community.  Secretary for Economy and Finance Francis Tam said the government will soon roll out the definition for ‘gaming zones’ and ‘non-gaming zones’ in 2013, in which case, gaming venues within gaming zones will need to be relocated.


The government is going to strengthen gaming supervision in 2013 to push ahead the development of gaming business in a moderate and orderly manner. Efforts will be made to cap the commissions for junket promoters to no higher than 1.25% of the total bets.  The database of junket promoters will continue to be improved and the minimum internal control requirements should be carried out on a sustainable basis.



According to the administration of the Primorye Region, the construction of a first casino and a hotel has begun in the Far Eastern gambling zone.  The first stage of the Primorye gambling zone project, due to be completed by 2015, is supervised by the region’s governor Vladimir Miklushevsky.  Plans call for 12 casinos with the first phase of a three-part rollout to be completed by 2016 and a planned total investment of about $2 billion.  “The gambling zone itself is not the most important thing, but it is like an anchor. In the modern tourism business, income from the gambling zone itself makes from 30 to 40% of all tourism revenues. The rest comes from other sources, such as amusement parks and shopping centers,” Miklushevsky said.


Vladivostok is one of the four regions allocated by the Russian government to have gaming.  The mountainous region bordering China and Korea is roughly a two-hour flight from Seoul or Tokyo.



The project for a boutique casino hotel in Cotai, just next to One Oasis residential project, is one step closer to becoming a reality.  The investors are eyeing to inject the project into Hong Kong-listed construction and property management company Paul Y. Engineering Group Ltd, PYE for short, and then use the company as a platform to raise capital.

According to a PYE stock filing dated from yesterday, there is already has an agreement to buy the land needed for the casino hotel from the developers of the One Oasis residential project.  The total estimated cost of the project is HK$6 billion (US$774 million), including the cost of the land.  To help fund the project, there are plans to raise up to HK$800 million through a stock placement. An additional HK$2.4 billion will be raised through issuing convertible bonds.


Stephen Hung, the vice chairman of Rio Entertainment Group, the holding company that operates Rio Hotel & Casino on the peninsula, has already indicated his intention to subscribe for HK$200 million worth of placing shares and/or placing convertible bonds.  Construction could start early next year in order for the property to be ready by 2016.  In the stock filing, it is not disclosed under which casino operator’s gaming licence the casino would operate.


The boutique casino hotel, to be built on a 6,000-square meter plot, is projected to have 66 live gaming tables.



Singapore's Changi airport saw passenger traffic rise 10% in October.




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Takeaway: We continue to see upside in this stock to $40 over the long-term TAIL.

JACK reported 4QFY12 EPS last night.  The current climate is challenging for all restaurant operators but we remain confident in our tail thesis on Jack in the Box.  We would highlight the gulf between consensus estimates for JACK revenue and the result last night as indicative of the risk there is in consensus estimates for this company.   We think the headlines, which were largely misrepresentative of the reality of Jack in the Box’s 4QFY12 results, caused the sharp sell off after hours.  We continue to see upside in this name to $40 over the next three years.  Here is a quick run-through of what we will be focusing on during the earnings call at 11:30 ET. 



  • JIB SRS were a big upside surprise, will be interesting to hear on the call if marketing was ramped up significantly for the September quarter
  • 2-year SRS trends accelerated for to 4.5% and 2.7%, for company and franchised JIB restaurants
  • Qdoba a big downside surprise at 0.8% and two-years trends slowing to 2.3%.  Gary Breisler, President of Qdoba, left intra-quarter
  • We will want to pay attention to growth expectations for Qdoba.  If SRS trends remain at current levels it could lead to some growth being postponed



  • Cost of sales were higher than expected.  I suspect that we will get a look into FY 2013 commentary on beef outlook on the call
  • Labor costs were lighter than we modeled, due to lower labor trends at JIB.  How sustainable is this and can we see more of this in FY2013.
  • G&A a bit heavy once again.  G&A has been trending higher for all of FY2012.  Why?


Guidance issued for FY13:

  • 1QFY13 SRS 1-2% at JIB co-op and Qdoba co-op.
  • FY SRS at JIB co-op 2-3% (we think this is conservative guidance)
  • FY SRS at Qdoba co-op 2-3% (we believe management is being cautious and will seek to prove Qdoba margin story in FY13)
  • 1Q13 SRS seem to be below the current street expectations. 
  • Commodity costs up 2-3% (refranchising a good move but franchisees will feel burden of beef costs)
  • Company will no longer provide guidance for refranchising gains as results will become cleaner



JACK THESIS INTACT - jack co op sss


JACK THESIS INTACT - qdoba system sss



Howard Penney

Managing Director


Rory Green





Time & Truth

“Time in truth, discovers everything.”



Bertrand Russell once claimed that, “Western philosophy begins with Thales.” And while I am not so sure about that being the truth, Thales was closer to getting to my definition of the truth than most Greek philosophers – he used math.


Thales used geometry to solve problems such as calculating the height of pyramids and the distance of ships from the shore. He is credited with the first use of deductive reasoning applied to geometry… he has been hailed as the first true mathematician.” (Wikipedia)


The aforementioned quote comes from a book I started reading this past weekend titled Pythagoras The Mathemagician (pg 87). Since we’re in the midst of a bull market in Old Media storytelling, I needed to suspend disbelief and consider magic too.


Back to the Global Macro Grind


Yesterday was a hoot. On no-volume (21% below the average US stock market down day volume in November), the SP500 melted up +1.99% to 1386. That was the biggest up day since September 6th (+2.04%). Back above my TAIL risk line of 1364. Hoowah!


Let’s not talk about September though. That was a time when The Bernank’s stock market magic stopped. As a friendly reminder, inclusive of yesterday’s squeezage, the SP500 is still down -6% from the September 14th YTD high.


But why? What is the truth? Have stock and commodity markets been going down for 2 months only because of the #KeynesianCliff? Or did a few things related to economic gravity (growth and earnings) have something to do with it?


To review, our Top 3 Global Macro Themes for Q4 are as follows:

  1. Earnings Slowing
  2. Bubble #3 (Commodities)
  3. Keynesian Cliff

So, I’m not saying that Theme #3 doesn’t matter. I’m not saying that Bubble #3 doesn’t either (we re-shorted Oil on yesterday’s ramp, and bought Natural Gas). I’m simply saying what I always say – embrace uncertainty, because the global marketplace’s interconnected risks are much more encompassing than a manic media sound-bite about timing the cliff.


Back to reality. Now that Q312 Earning’s Season is winding down, per Darius Dale’s scorecard, what has Time & Truth told us about #EarningsSlowing?


1.   Roughly 96% of the way through the Q3 earnings season, 58.7% of SP500 companies have missed on the top line and 30.7% have missed on the bottom line (478 total). That compares with 57.8% and 26.8%, respectively, in 2Q12. If the season wraps up as things currently stand, 3Q12 will have reported the lowest percentage of companies beating on the top line since 1Q09.


2.   72% of companies that have issued 4Q12 EPS guidance have issued projections below the mean EPS estimate. That compares with a ratio of 80% on the negative side at this time during the previous earnings season. Despite this improvement, we continue to warn that consensus estimates for 4Q12 and 2013 remain dramatically inflated relative to any reasonable economic GROWTH scenario.


3.   Bloomberg consensus still has SP500 constituent EPS growing an average of +7.1% YoY per quarter over the NTM vs. +0.9% YoY in 3Q12 and a trailing four quarter average of +3.1% YoY. While down from a projected quarterly average NTM EPS growth rate of +9.9% YoY when we first called out consensus’ poor modeling technique back on OCT 8, we still contend these estimates remain out to lunch.


Out to lunch? Yes. As in no soup fo you Mr. Sell-Side consensus. It’s been a long year for you on GDP growth and earnings forecasts. Maybe we should just pretend those 2012 predictions didn’t happen. Long live Hyman’s 569 “global easings” instead.


Money printing, of course, is not magic. The slope of growth in money supply is just math. If Bernanke doesn’t double or triple his monthly debt monetization soon, the slope of the Fed’s balance sheet will continue to slow. That’s bullish, on the margin, for the Dollar.


Perversely, in the immediate-term what’s good for the Dollar is bad for stocks. Part of yesterday’s fun times at no-volume high was that the US Dollar was having its biggest down day in 3 weeks. A -0.45% down day on the USD Index = a +2.8% up day for Basic Materials (XLB) stocks. Hooray.


Just a quick update on the Correlation Risk math (using 30-day correlations versus the US Dollar Index):

  1. SP500 = -0.90
  2. EuroStoxx600 = -0.85
  3. MSCI World Index = -0.89
  4. CRB Commodities Index = -0.84
  5. CRB Food Index = -0.79
  6. VIX = +0.44

In other words, yesterday’s rally to lower-highs (SP500 still down -1.8% for November after the +1.99% move) has nothing to do with what I called bullish in Monday’s Early Look (Food Deflation and Commodity Speculation Imploding). It had everything to do with the same old playbook the bulls who have confused stocks with the real-economic growth have been using all year.


Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), Natural Gas, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.96-111.35, $3.56-3.88, $80.69-81.39, $1.26-1.28, 1.49-1.64%, and 1, respectively.


Best of luck out there today,


Keith R. McCullough
Chief Executive Officer


Time & Truth - Chart of the Day


Time & Truth - Virtual Portfolio

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