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I have been chiding Burt Vivian about his sourpuss attitude when speaking to the street. Right now, few restaurant companies are "kicking ass" so there is part of Burt's commentary that is born out of the reality of today's economic climate. But anyone who has heard him recently knows that he takes cautious commentary to a whole different level than other restaurant industry executives.

Is his overly cautious tone having an impact on the stock? It sure looks like it!

I have been cautious on the casual dining names for the better part of a month as we head into 2Q09, with many companies facing stimulus headwinds. While the group has been churning in a tight range, I'm less convinced there is any real reason for them to go down.




I'm now becoming a bigger believer that for most restaurant companies, the top line is not that relevant - to a point. In 2Q09, if a company misses top line expectations, but can beat earnings by a significant margin, the stock is not going down. Even on a lower sales base operating margins are rising, which implies that cash is growing. The mature casual dining companies that have whittled growth capital to a minimum are gushing cash! On this basis the stocks are cheap!

The mature casual dining names always seem to move in a pack and there rarely is there a "best in class" company. For years, it seemed like PF Chang's (PFCB) and The Cheesecake Factory (CAKE) have been on the same trajectory. Both companies have been living the same life cycle and benefiting from the same industry trends. Still today the companies seem to parallel each other, yet a significant discrepancy exists that is not easy to reconcile and definitely worth a closer look.

I'm not sure a pair trading these two will work on the margin; they're either both going to keep working higher or they both won't. The Research Edge Quant model's set up is bullish for both companies, not including the short interest factor. The short interest factor is off the charts for PFCB!

The set ups look like PFCB is trading at 6.1x EV/EBITDA versus CAKE at 7.9x. The short interest for PFCB is an astounding 40.1% and only 14% for CAKE. The consensus has voted and PFCB is going down hard! I'm not convinced that there is a smoking gun at PFCB. For every improvement in PFCB's cash flow multiple is $5.66 of upside.

While still relatively small in size, PFCB is a mature restaurant company throwing off lots of cash. Like many restaurant companies, the slower, more controlled growth is having a significant impact on the company's financials. I have always used a company's return on incremental capital as an initial screen to understand where the company is going with its cash. Is a company reinvesting its cash to generate the best return for shareholders? On this metric PFCB is killing the competition.




Both concepts experienced a nice improvement in 2-year same-store sales trends in 1Q09 with PFCB having seen slightly better earnings revisions over the past three months at 35% (25% for CAKE). Both companies run the risk of a sequential deceleration in same store sales trends, but I don't think that really matters for either company. Margins are improving on the back of cost cuts, pricing and lower inflation. My model is coming up with estimates for 2Q09 and for FY2009 that are significantly better that consensus estimates.

Where is the negative catalyst? Or is Burt to blame for the discount valuation?

What do you think the shorts are going to do when Burt Vivian gets up in front of the investment community and his sourpuss face is gone?


The Golden Rule

"I followed a golden rule, namely, that whenever a published fact, a new observation or thought came across me, which was opposed to my general results, to make memorandum of it without fail."
-Charles Darwin
Darwin's Golden Rule is one that needs to be rigorously applied to The New Reality of global finance. Global markets, across countries and asset classes, are as interconnected as they have ever been. Those who get this will triumph as the horse and buggy whip investment structures of levered long cycles past continue to collapse.
I have learned many a lesson in a compressed period of time in this business by simply using live ammo. I learn by making mistakes. I then force myself to un-learn, and re-learn. That's it - that's what I do.
What it is that other people do, isn't entirely clear. In many cases investment mandates aren't real-time and objective - but we must thank God for the blessings associated with mental inflexibility. Without that, market's would actually have a chance at being efficient across all durations, and there wouldn't be any market "calls" left to make!
Last week, I wrote an Early Look titled "ZERO" - as in I took my position in US Equities to zero. On balance, that position didn't hurt me - but it really didn't help me either. The YTD high for the SP500 came at the close of trading on June 2nd, so I wasn't there holding the bag of levered long exposure after a +40% trough-to-peak short squeeze of generational proportions... but I don't think I made anyone any money last week either. I don't aspire to be average - and that's all my "ZERO" call was.
Yesterday, the market touched my immediate term support level of 927, so I started covering and buying. Having any position in this increasingly correlated market place of global macro factors should never be perpetual. My "ZERO" position turned out to last all of a week.
The Golden Rule, in simpleton hockey speak, boils down to a very basic premise. One of my mentors in life, Coach Tim Taylor, called this "moving your feet." As the factors around you are changing, you have to be changing with them. If you stop moving your feet (and you have the puck), prepare those risk management models - because there is a heightening probability of your getting run over.
We'll see how Sidney Crosby's feet are moving tonight in Game 6 of the Stanley Cup Finals - my proactive prediction is that they'll being moving real fast. But what about the group-thinkers of Wall Street's braintrust? In the last 3 days of US fixed income trading, plenty of cost of capital assumptions have changed... and no one seems to want to do anything but limit their career risk in addressing them.
What does that mean? Oh, that's the little thing called nodding that some people in our business do in meetings when their bosses have a stagnant investment point of view. Trust me, I got fired for being too bearish in Q3 of 2007 - I don't do nodding.
This morning's groupthink is glaring. If I have seen one article quoting someone with a title in this business about Bernanke not raising interest rates, I have seen 100 - and that's probably only because I only have one set of eyes. Fifteen out of the 16 "primary dealers" of the US Federal Reserve don't think the Fed hikes rates in 2009. That's about the same number of soothsayers in De Geithner Club who didn't see a stock market crash coming in 2007. Can they afford to think he might hike?
What are some of the critical facts that have me getting invested in REFLATION again, at a price?
1.      Chinese stocks on the Shanghai Stock Exchange powered forward again last night, closing at fresh YTD highs of +53.1%

2.      Dr. Copper, who has an 88% correlation to China's stock market in 2009 , is hitting higher-highs this morning at $2.31/lb (that's +64% YTD)

3.      The US Dollar faded like a sell side strategist trying to call the SPYs right at long term TAIL resistance of $81.72 yesterday, re-igniting REFLATION

4.      Oil prices have shot up over +2% in the last 24hrs (Gartman shorted oil yesterday on the pullback, sorry man)

5.      Russian equities (which anchor on Chinese demand and Oil prices) are trading up almost 1% again this morning, taking them to +75.3% YTD

6.      3-month LIBOR, which has gone down, literally weekly for months, bumped up this morning for the 1st time - on the margin this matters

I have 27 factors that change dynamically in my macro model, so I could go on and on... but the bottom line is that I make moves in terms of both Asset Allocation and virtual long/short positions as the facts change. Sometimes these facts and correlated factors change quickly, sometimes they don't. But the Golden Rule remains - "whenever a published fact, a new observation or thought came across me, which was opposed to my general results, to make memorandum of it without fail."
With a highly incentivized (and politicized) US Financials system geared towards letting Piggy Bankers get paid via a US Dollar collapse (nice to see Timmy is back in the USA and JP Morgan's stock riding higher into yesterday's close in the advent of a morning headline "10 Banks Allowed To Payback TARP"!), I get where I need to move next - being longer of things that can REFLATE. All the while I can maintain a "ZERO" level of trust in the said leaders running this US stock market joint.
My immediate term upside target for the SP500 is now a higher-high at 963. I'm bumping up immediate term support to 928. Trade the range.
Best of luck out there today,


EWA - iShares Australia- EWA has a nice dividend yield of about 5% on the trailing 12-months.  With RBA rate cuts showing signs of working and a commodity based economy with proximity to China's reacceleration, there are a lot of ways to win being long Australia.

FXA -CurrencyShares Australian Dollar Trust-Thanks to recovering Chinese demand for commodities, the sure handed management of RBA Governor Glenn Stevens and comparatively modest consumer debt levels -Australia's GDP continued to expand in Q1 while other industrialized economies saw double digit declines.  As with Canada, we like the Australian economy as an offset to the toxic US balance sheet.  

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We bought XLV on 6/08 to get long the safety trade.

EWC - iShares Canada- We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.   

XLE - SPDR Energy- We bought Energy on 6/05. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

CAF - Morgan Stanley China Fund- A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.

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. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.

XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser.

EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.


The Las Vegas locals market posted its third straight "better than bad" month where gaming revenues fell in the single digits.  While this isn't a same store decline - Station's Aliante and The M Resort opened in 2009 - the sequential trends are encouraging.  The 6 month moving average pivoted upward in April and comparisons ease, for the most part, as we work through the year. 


WRITING OFF LV LOCALS FOR 2009? - lv locals april delta chart


BYD is the big public traded entity in the Las Vegas locals market.  The negative thesis on BYD continues to center around the prospects for the Locals market.  We've all but written off 2009 and have instead focused on 2010.  Our contention is that population growth will likely boost 2010 gaming revenues into positive territory despite the obvious economic issues.  For 2009, we project a 13% decline in BYD's LV Locals revenues.  Obviously, if current trends continue, BYD's LV revenues could exceed our estimate.

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On Sunday, Sunstone REIT (SHO) provided a business update and discussed an "elective default" on their W San Diego property after failing to come to an agreement with their CMBS special servicer.  The company expects to "pursue similar options with certain of its other mortgaged hotels" where the mortgages exceed the value of the property.  We expect to see other REITs and private owners follow suit and hand back the keys on many properties over the next three years, mostly on mortgages underwritten at the peak of the market.


Back on May 20th, SHO amended its exchangeable notes indenture to increase the permissible basket of defaults on non-recourse indebtedness from $25MM to $300MM, before triggering an acceleration of payment.  This amendment was specifically aimed at increasing SHO's ability to exercise its option to walk away from "over-leveraged" assets.  We haven't seen this type of amendment pursued by other lodging companies yet, but expect that those that have limited baskets on non-recourse defaults to pursue similar strategies in the future.


This particular asset faced a more extreme situation than most hotels.  Deteriorating fundamentals in the San Diego upper upscale hotel market assets and increased supply created one of the worst hotel environments in the country.  Still, the W San Diego outcome provides another data point on the fallacy of using "NAV" to support valuations.  The confluence of the supply/demand issues led to the determination by SHO management that the asset was permanently impaired.  It no longer made sense to fund the negative cash flows of this asset ($4MM of interest expense vs 2009E EBITDA of $2MM).  Interestingly, the mortgage still had 8.5 years left before maturity and an attractive rate of 6.25%, so this was truly a proactive default.  


Sunstone acquired this asset in 2006 for $96MM or $372k per key and handed the keys to the lenders at $252k per key.  They concluded that the asset was worth "much less" than the $65MM mortgage on it.  Generating just $2MM in estimated EBITDA, the company made the accretive choice surrendering this asset at 32x EBITDA.  We're not sure how much less SHO thinks this asset is worth but we would guess somewhere in the $30MM range is more reasonable, a staggering 70% below where it was acquired just 3 years ago.

ZQK: Beware of Thesis Morph

My gut (and math) tell me that ZQK’s decision to accept a pe investment and restructure its debt was probably the right call. The downside is that monetization of other assets is off the table. Now you need to own for the base business, which is a call for a different duration.


To say that there were fireworks in Quiksilver’s 2Q is probably an understatement. The direction of operating results was never a major source of discussion over the past few months – it was all about whether the company would sell DC Shoes, and what price would be needed to fix the balance sheet without diluting cash flow.


Well… The conversation just changed. ZQK restructured its balance sheet with a $150mm private equity investment, a $200mm term loan, and a European debt restructuring to be finalized in the coming weeks. This likely puts the lid on a DC sale in the near term. It would be highly unlikely that the new private equity partner would have gotten involved with a $150 million term loan (5 years) with detachable warrants representing 20% of shares outstanding (7 year expiration) if the company was going to offload its prized asset. ZQK is now back to a cost reduction and rightsizing exercise that won’t begin to bear fruit until the very least 2010.


This might have been the exact move that the company needed to protect its long term brand equity and maximize NPV. But my concern is that most investors buying the stock from $1 up to $3.60 were not as focused on the fundamentals as they were a potential deal.


But hey, on a positive note, it took McKnight over 1,000 words of his prepped remarks to get to any remark about Kelley Slater.


Eric Levine/Brian McGough


ZQK: Beware of Thesis Morph - ZQK SIGMA

The World Cup of Unemployment: Canada versus United States



Position: We currently are long Canada via the etf, EWC


We reinitiated our long position in Canada late last week on the back of some extensive work we had been doing comparing the fiscal health of Canada versus the United States.  We also wanted to make a quick call out highlighting comparative unemployment trajectories between the two countries.


Our Lead Desk Analyst, Andrew Barber, looked at unemployment rates going back in both Canada and the United States about thirty years to 1979.  Over that entire time period, the United States has, on average, been 2.51% more employed.  That is, the unemployment ratio has been lower by 2.51%.  The chart comparing these long term rates is attached below.


For the past nine months, unemployment in the United States has been higher than in Canada.  The only other period in which that was the case was from 1, which was a period in which Canada was between 0.1% and 0.4% more employed.  As of the most recent data points, Canada is currently 1.0% more employed, which is a full 3.51% above the thirty year average between the countries. 


Historically, unemployment in Canada and the United States has been very close.  The first key divergence occurred in the recession of 1 and was attributed primarily to differing fiscal responses to the recession in both countries and a greater dependence of the U.S. on foreign oil.  The unemployment rates of both countries effectively entered the 1980s in lock step until 1982 when the U.S. began a long and sustained period of lower unemployment.


A key factor that led to this divergence was outlined by David Card from Princeton University in a 1995 paper entitled, "Unemployment in Canada and the United States: A Further Analysis".  According to Card:


"The relatively low UI qualification thresholds in Canada create a variety of incentives for individuals to change their annual work patterns . . . Other individuals who might, in the absence of UI, have worked a substantially larger fraction of the year have an incentive to reduce their annual weeks of work, since once the individual is qualified for UI the net income per week of work is equal to the weekly wage minus the UN benefit that the individual is entitled to."


In effect, the Canadian unemployment system is, and has been, set up to potentially incentivize certain segments of the population to remain unemployed longer and for certain parts of the year.


The two countries also classify unemployed workers slightly differently.  Primarily, this difference relates to the treatment of passive job seekers.  This is a group whose job is to find a job.  In Canada, this group is categorized as unemployed and in the unemployment statistics, while in the United States this group is shifted out of the labor force.  This is estimated to account for up to 1/5 the employment difference between the two countries.


In summary, while unemployment is inherently a backward looking indicator, the divergence in unemployment rates between Canada and the United States is noteworthy, especially given that Canada by way of classification and incentivizes should have a higher unemployment rate.  To the extent that commodities continue to re-flate it is exceedingly likely that Canada continues to widen the unemployment spread and relative GDP growth rates should reflect this.


Daryl G. Jones
Managing Director


The World Cup of Unemployment: Canada versus United States - can1

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