WEN – Was my initial assessment right?

June 19 (Bloomberg) -- The rally in high-yield, high-risk bonds may have spawned its first dividend deal in two years. Wendy's/Arby's Group Inc., which issued $565 million of 10 percent notes due in 2016 yesterday, will use the proceeds to repay debt and make a "distribution," potentially for dividends and stock repurchases, the Atlanta-based company said yesterday in a statement. Billionaire Nelson Peltz's Trian Fund Management LP is the largest shareholder of Wendy's/Arby's.

Increasing leverage to buy back stock does not create long-term shareholder value.





Grounded Norway

A look under the hood

Position: No active position; bullish bias

The nose dive of the Norwegian stock market (OBX Stock Index) on 6/17 in the wake of the Norwegian Central Bank's decision to cut the overnight deposit rate 25 bps to 1.25% peeked our interest as an outlier. The market's reaction to the cut, closing down 4.97%, appeared bearish, yet in a broader context the close didn't look as harsh:  (1.) the cut came unexpectedly as economists predicted that the Central Bank would first consider a cut in August, and (2.) most of Western and Eastern Europe also sold off on negative US-centric news, including increased fears of the expansion of the US government balance sheet, the threat of near to immediate-term inflation, and Obama's plan to restructure the financial industry.

While Wednesday's close was bearish, the stock market is up 31.3% YTD and we believe the country sets up nicely from a fundamental standpoint. Being outside of the EU, Norway has the ability (and some say luxury) to better maneuver its economy through monetary policy. With economies in contraction throughout Europe, it's become increasingly apparent the challenges the ECB faces in affecting policy for varied economies. In contrast, Norway's control over interest rates and currency levels has allowed it more flexibility to manage its economy. [From an autonomous perspective similar considerations could be made for Sweden (via the etf iShares EWD) and Switzerland (EWL), which we had in our portfolio on the long and short sides respectively this year.]

Fundamentally, Norway looks relatively healthy compared to some of its European peers.  Already lower interest rates and stimulus measures have encouraged shoppers to spend, confirmed by retail sales rising 1.4% on a monthly basis in April and consumer confidence improving. Inflation rose to 2.9% in May year-over-year and is expected to average 2.5% this year before pulling back to 1.75% in 2010 according to the statistical office.  The mainland economy (which excludes oil, gas and shipping) is forecast by Norges Bank to contract 1.5% this year and return to grow of 2.5% next. We'd be quick to point out the prospect of stagflation, yet Norway's rate of GDP decline is manageable, especially as the economies of the Eurozone and Sweden, its main trading partners, improve. 

Playing to its Strengths: Oil & Gas

Norway's economy benefits from its rich off-shore oil and gas fields. Norway's petroleum industries account for ~23% of GDP, close to 50% of exports, and about 31% of government revenue in 2007, according to the latest IMF paper under the listing "Summary of Norway's Transparency Practices for Petroleum Revenue Management".  If oil could sustain this level or better it would be decidedly bullish for Norway's economy as both an exporter and beneficiary of oil and gas royalties.  The chart below illustrates the prospect of this price level for Brent based on a three-year moving average.  Oil's YTD upward move of ~55% has certainly helped to propel the stock market to over 30% YTD, while neighbor Sweden stands at 17.5% year-to-date, and export-giant Germany's stock market (DAX) is up less than 1% YTD, as a comparison.

Today Royal Dutch Shell Plc, Europe's largest oil company, said it discovered a natural gas bed in the northern Norwegian Sea estimated to hold 10 to 100 Billion standard cubic meters of gas. While the discovery isn't particularly noteworthy considering Norway's net gas output was 99 Billion cubic meters last year, should Norway supply Europe's demand for natural gas it would have major geopolitical implications. You'll recall that we've been tracking the rising geopolitical tension between Russia and Europe over natural gas, which hit a crescendo over the New Year when Gazprom shut off supply to Ukraine and limited gas through Belarus (two main transit routes to Europe) that led to reduced capacity throughout Europe. The move, which disturbed many (esp. following Russia's invasion of Georgia), encouraged great debate among the European Commission to find an alternative to Russian natural gas, in short, to bypass Russia's political leverage over gas. Debate has included resumed talks of LNG capabilities, increased investment in renewable technology such as wind harvesting, and alternative pipelines to bypass Russian territory such as the Nabucco project, yet talks (and action) have stalled due mainly to price: Russian gas is still the cheapest option by and large. 

Conservative Banking Practices

The historically conservative lending practices of Norwegian banks, focused more on prudent products and domestic loans rather than exotic credit products and global reach, has helped them not only weather the recessionary environment, but better position themselves for future lending. Despite leverage to Icelandic banks and customers, by and large the conservative nature of Norwegian banks has favorably positioned them. We believe this may encourage Norway to outpace its Eurozone peers on a recovery basis.

Managed Economy

Norway's economy has a unique blend of free market and state controlled enterprise. The latter is concentrated in its main industries, including: petroleum sector (StatoilHydro), hydroelectric energy production (Statkraft), aluminum production (Norsk Hydro), Norway's largest bank (DnB NOR), and telecommunication provider (Telenor).  Norway has a very manageable population of less than 5 Million and due to the historic wealth of the country (Norwegians have the second highest GDP per-capita after Luxembourg), it has not seen major economic swings-such as an extensive housing bubble or excessive amounts of foreign debt-that have plagued some of its European peers. 

Despite this positive fundamental set-up, and to the dismay of investors, neither Norway nor Scandinavia has an ETF or liquid product to get long the country. StatoilHydro (STO) currently trades on the NYSE and could be an oil play for us as we get more conviction on a longer term trend.   

Matthew Hedrick

Grounded Norway - brent


The street is decidedly negative (25% of the ratings are Buys) on Starbucks relative to the other large capitalization QSR restaurant companies, according to Thompson/Reuters. Interestingly, the company with the biggest rating is Burger King (75% of the ratings are Buys) and it is the worst performing QSR stock: down 30% this year. The fact that there is a large Private Equity firm with a big position has nothing to do the analyst opinion of the company.




I still believe that there is a significant catalyst coming for Starbucks when we settle the perception that McDonald's McCafe is not taking significant share from SBUX. We are getting closer to that day.

I don't care how negative people are on Starbuck's; the core of the business model is very healthy and is showing very sustainable trends that were not there three to six months ago. For the past two quarters the company has posted sequential improvements in operating margins and will report year-over-year improvement in 3Q and 4Q of 2009. This is directly attributable to the progress SBUX has made on its cost cutting initiatives. In 2Q09, SBUX delivered $120 million in cost savings, exceeding the $100 million target. For the balance of the fiscal 2009, SBUX has cost savings of approximately $150 million in 3Q09 and $175 million in 4Q09. In order to sustain continued stock price appreciation, SBUX cannot rely on cost saving initiatives alone. Investors will expect to see an improvement in same-store sales to keep the stock working.

That being said, I set out to come up with a way to gauge SBUX's progress toward improving monthly sales trends, which resulted in the inception of the SBUX monthly "grass roots survey." The stores surveyed represent a geographic mix across the U.S.


The survey indicates that May same-store sales on average were flat to -1%. This compares to our previous survey indicating that March same-store sales on average were flat to -3%. As I said in March, these numbers are so good I don't believe what I'm seeing. Naturally, I provided a haircut to the numbers, but that would still put SBUX same-store sales at down 3-4% versus 5-7% in March.

This would be a significant improvement from the trends in fiscal 2Q09 when same-store sales declined 8%. I continue to think that it is more important to focus on the numbers on a directional basis, rather than looking at the absolute numbers, and directionally, these May numbers look better than what we have been seeing for some time from Starbucks' U.S. business. These numbers are even more impressive given that McDonald's was heavily promoting McCafe in May.

Other highlights of the survey:
(1) 80% of the stores reported a sequential improvement in sales trends in May from April
(2) 58% of the stores reported positive comps up from 21% in March - the average was +4%
(3) The stores reporting negative comps were down 5-6%
(4) The average number of breakfast combo's was 14 in May down from 19 in March. Note that 1/3 of the stores in March were not selling breakfast combo's yet
(5) Suggestive selling helps improve the attach rate of combo's.

Right now, I think SBUX could be tracking down 5-6% in same-stores sales for 3Q09.



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Risk Management Map: SP500 Levels, Refreshed...

In t-minus an hour, I'll be turning off my screens for the next week. Ahead of that, I felt like I should leave a map.

Below are the risk management lines of the SP500's current setup. While plenty a pundit continues to try to call for squeezes and crashes (AFTER the big ones occurred), I think its most sensible to dial down your gross long exposure and trade this proactively predictable range.

•1.       I am dropping my immediate term TRADE support line for the SP500 down to 901 (from 904). Intermediate term TREND line support is significant at 848 (thick green line in the chart below).

•2.       On the upside, there's an immediate term TRADE line of resistance at 928 (I made a total of 6 sales up and into that line this morning), and the most important line resistance at 967. This is a new duration product that we are developing called the long term TAIL, which is 3 years or less, and very much a dominant force of price gravity.

Top to bottom, this is a 14% point range. That's a lot different than the -57% peak-to-trough crash, or the +40% trough-to-peak squeeze that ended last Friday at 946. Manage your daily risk accordingly, and best of luck.


Keith R. McCullough

Chief Executive Officer

Risk Management Map: SP500 Levels, Refreshed...  - ahead



For the first time in 30 years, wholesale inflation declined on a year-over-year basis

If you read Keith's note this morning, you know that lately we've come to realize that many people who read our work assume that because our model portfolio is tactical in nature, we are short term traders who operate purely in the moment. This perception is wrong: we execute tactically inside a defined strategic framework. 

Our work on India is a great example of this process: despite the fact that the Sensex is now up over 45% YTD, we are net positive in performance for our trades in Indian equities via IFN for 2009, despite having only taken short positions. Presumably those that accuse us of being short term thinkers consider each of those shorts a unique transaction, but for us it was a a single evolving investment thesis.

Since we opened for business over a year ago, we have had a strategic conviction that equity investors were overly focused on the opportunities for individual companies and industries in India while ignoring major structural issues that stand in the way of real progress on a long term basis. It is because of these macro headwinds that every single time we have taken a position in Indian equities it has been a short.  Some may see these transactions as individual trades, but for us they are all part of a longer term portfolio process. 

Inflation data released yesterday presents an interesting inflection point for our India thesis.  With WPI plunging, one might expect that Indian analysts would be uniformly bullish. After all this it leaves tremendous room for further loosening by the RBI.  Instead consensus among analysts and economists is an expectation that inflation will return rapidly, with a high single digit forecasts for Q1 next year.  This is not in itself a major negative for the Indian economy, but there are key pieces to the puzzle that have yet to be factored in:

  • CPI data is released on a long delay by the department of labor, but as the chart below illustrates, the April data continues to suggest that consumer prices have not declined appreciably despite the collapse in wholesale levels. This does not bode well for consumers when inflation returns.
  • The government plans to divest large positions in state controlled energy companies accompanied by a loosening bias for price caps in order to induce investors to step up. If energy commodity price inflation rears its ugly head in 2010, the dilemma facing investors will be whether rising fuel costs inhibit consumer spending growth or if government price caps destroy margins for refiners and utilities.
  • Even inside the WPI complex, the pricing of many individual components are continuing to increase, and food prices nationally continue to show double digit growth.

We continue to take a pessimistic view of long term opportunities for Indian equities and will opportunistically look for entry points defined by price action to short.  When we do, rest assured, in our minds it will be part of an investment strategy for Asian equities and not just a quick trade.

Andrew Barber




CCL put up a terrific quarter, all things considered, and issued lower guidance, but better than we thought.  Some of the cost savings generated in the quarter look like they are sustainable.  The cost savings, combined with Fx benefits are causing us to raise our 2010 estimate to $1.60.

However, our $1.60 is well below the Street at $2.07.  While most analysts project flat yields in 2010, we believe demand will not increase even close to the 9% necessary to offset the industry capacity increase.  Management hinted at this with their limited discussion of Q1 bookings. 

"We do expect to have yield declines in the first quarter of 2010. This results from year-over-year comparisons being very difficult since a good percentage of 2009 first quarter business was booked before the economy began entering into the recession in the third and fourth quarter's of last year."

Here are our takeaways:


  • Came in line with our revenues , but beat on the costs (that's where we thought they could probably be better than expected)
  • Beats came in two categories - commissions/ cost of distribution and rebates (cost of passenger tickets) and "other shipping costs" which we increased after the company guided to the swine flu impact. D&A was 7MM lower than our estimate and there was also 5MM of "other income" which we didn't include in our forecast
  • The $1.7BN of debt that CCL raised this quarter puts their balance sheet in good shape, as they will be able to finance their entire pipeline and still have plenty of availability on their Revolving Credit Facility


  • Net yield guidance for 2009 is unchanged, simply adjusted for the weaker dollar, which benefits revenues and hurt on the cost side (relative to guidance last quarter)
  • As expected, net cruise costs will decline less than previously forecasted given the run up in fuel costs and weaker dollar. However, excluding fuel, cost cuts were better than previously guided too (again no surprise here)
  • Fuel impact as we expected, and we think that CCL left themselves a little cushion for further increases as well. Their 3Q09 guidance for fuel costs is about $15 higher per metric ton than our assumption.
  • CCL gave some preliminary commentary on 1Q2010. The good news is that, as of the last few weeks at least, booking volumes are on pace with what they were one year ago for the comparable period on a supply adjusted basis. The bad news is that early indications point to negative yields for 1Q2010. The reality is that CCL won't know where pricing is shaking out for at least one more quarter. Our guess is that it will still be down unless demand miraculously comes in 9% higher. The math is simple; any shortfall is made up with price reductions.

The stock had a nice day yesterday, and rightly so.  Today we've had a couple of upgrades which have pushed the valuation to 17x our 2010 number.  CCL is not overly expensive but the valuation a little worrisome for a company facing uncertain demand, big capacity increases, and declining ROIC.

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