If MCD goes after the premium segment in August, it will not be good for CKR

According to the Chicago Tribune (they always seem to get internal company documents), the premium Angus burger will be rolled out in August. The document refers to a national launch for the one-third-pound Angus burger between Aug. 3 and Aug. 30.

McDonald's began testing the burger in Southern California in March 2007. It is made from made from a higher grade of beef than other McDonald's burgers and it will become the most expensive U.S. sandwich on the menu, priced at about $4.

Last fall management said they wouldn't roll out the Angus nationally in a weak economy. Lower beef prices are likely the reason for the launch. Don Thompson told the franchise community that the Angus is a "Big Opportunity" because beef costs are down. This could also mean that McDonald's can introduce the product with lots of coupons to stimulate trial. You can see it now, a coupon for a free latte with the purchase of an Angus to boost McCafe sales or vice versa!

I see this as being a big negative for CKE Restaurants (CKR). While the Angus burger has been in Southern California since 2007, a more aggressive approach to the pricing of MCD's premium product will hurt Carl's Jr. As it is, Carl's Jr. is already struggling with its premium pricing strategy and MCD is not going to make it any easier.

Lastly, I have not seen a QSR chain generate incremental traffic by introducing premium products.

As an aside, I'm starting to see a lot of ads for the MAC snack wrap....... Now this looks good to me!

McDonald's - GOING PREMIUM - macsnack



The tourism authorities of Macau and Shenzhen will carry out joint promotions in Taiwan, South Korea and Japan in 2010. In July, the two tourism authorities will meet again to discuss details about the establishment of a mechanism for management of tourism and information exchange. The two sides also agreed to publish a joint brochure to promote Macau-Shenzhen as multi-destination.

In 2008, Macau received 22.9 million tourists and Shenzhen roughly 60 million both foreigners and Chinese.


The financial crisis has brought significant cuts to the number of flights serving Macau, as carriers struggle to respond to the massive drop in cargo volumes and passenger traffic. 

China Eastern Airlines has cancelled all of its scheduled flights to and from the gaming hub in the first three months of the year, compared with an already dismal 67.7% cancellation rate in the second half of last year, figures from the Macau Civil Aviation Authority show.

In the first quarter, Fujian-based Xiamen Airlines slashed 59% of Macau flights, with Malaysia Airlines and debt-laden East Star, a private carrier, cutting 38% and 40% of their Macau flights, respectively.  Troubled carrier Air Macau cancelled 9% of its flights in the first quarter.

Aviation Authority president Simon Chan Wing-hung said, in a written reply to local legislators, that the cancellations were not solely caused by the effects of the financial crisis.  Mr. Chan also points out that the increase in the number of flights between the mainland and Taiwan had an effect on Macau flights.

In the first four months of the year, passenger traffic in Macau fell 21.7 per cent from a year ago, while cargo volumes plummeted 65.7 per cent, according to figures from Macau International Airport. Aircraft movements have declined 22.4 per cent over the same period.


Macau's Department of Health confirmed another two cases of swine flu over the weekend, taking the total of infected people in the territory to three.  One of the new cases was a female flight attendant from Viva Macau that flew to Sydney, Jakarta, and Tokyo between June 16 and 18.  The second case was detected at Kiang Wu Hospital, a private healthcare unit in Macau, and was a 54 year-old man who had recently stayed in Toronto for 17 days.

Despite the third confirmed case, the level of alert remains on "five" as all cases so far have been imported from abroad.


Ng Sek Io and Lei Kin Iun have teamed up to run for the Legislative Assembly's directly elected seats. The two delivered their voters' signatures to the Public Administration and Civil Service Bureau (SAFP) on Friday to confirm their legitimate existence but the list of candidacy has not yet been confirmed, according to the Va Kio Journal.

Ng Sek Io, the director of the United Free Union of Gaming and Construction Workers of Macau, told Macau Daily Times via the telephone that he will probably be the first candidate and Lei the second candidate.

Chasing The Tails

"Dream as if you'll live forever.  Live as if you you'll die today."
                                               -James Dean
We've sent Keith to Scotland for the week to get some rest, smoke a few cigars, and hopefully improve his golf game.  As a result, different members of our research team are going to take turns writing the Early Look this week, and applying our own unique individual lens to the interconnected world of global macro risk management.
Ironically, Keith and I have very different modus operandi when it comes to approaching every research day.  He operates under a strict regimen that incorporates getting into the office at exactly the same time.  My daily process is more based on chaos theory, or is at least chaotic. I get in every day at a different time, take a different route, and read a different collection of articles every morning (my girlfriend calls me the anti-type A).   
Despite these differences, Keith and I have worked together effectively for many years, starting on the hockey rink at Yale, working together at a major hedge fund in New York, and finally building a business that, we believe, is reinventing a broken sell side research model.  We sell our research for a simple fee, produce it real time, and have no conflicts of interests that are ever-present in banking, trading, or a prop desk.  
In terms of how we operate on our Macro Research Team, Keith focuses on the day-to-day grind of the market, while I spend more time thinking and writing about the longer term trends.   As the James Dean quote above implies, Keith manages risk like every day is the last, while I dream about the investment trends of the future.   We call these longer term trends TAILs, and it's my job to chase them.  
A TAIL, to us, is a theme and price that has duration of up to 3 years.  Often ideas with longer duration are less obvious, hence the term tail, which is a statistical term that is used to refer to the extreme area of a distribution.
When we look at the global investment landscape, we see a number of themes that are sitting there out there on the TAIL, these include:
1.       Demographic share taking  - Globally, we are seeing the Middle East and Asia take massive population share and this will only accelerate in the coming years (these regions are growing at 2.0% per annum), as the former Soviet Union and Europe have stagnant population growth patterns (growing at less than 0.5% per annum).  Domestically, we are seeing the emergence of a powerful demographic know as the Millennials (those born between 1), which will be much larger than the cohort before them, Gen X,  given that live births in the U.S. reached 4MM for first time since 1965 in 1985, and have stayed at that level since.  Companies that are positioned for age groups and regions that are taking population share, will inevitably have higher organic growth rates than their peers.
2.       Scarcity of resources - When we think of scarcity of resources, we are referring primarily to oil.  According to the BP Statistical Review of World Energy, from 2004 - 2008 global supply of oil grew at a CAGR of 0.5% and demand for oil grew at CAGR of 0.8%.  Despite massive investment in exploration and production from 2004 - 2008, the supply of oil globally barely budged.  If it were not for the global recession of late 2008 / early 2009, which will lead to an estimated decline of -2.9% in oil demand in 2009, the global oil market would be incredibly tight.  The reality is that the recession has only prolonged the inevitable tightness of world oil supply and demand.  Oil speculators aside, the reality remains that with any economic recovery we will see a tight oil market for years to come with the potential for exponential increases in the price of oil in the foreseeable future.
3.       Potential loss of American dominance - President Obama is approaching foreign policy with a very unique strategy versus his predecessors.  He is reaching out to our perceived enemies such as Iran and militant Islam broadly, and owning up to historical transgressions of the U.S. government.  This policy has the potential to make us look weak and embolden our enemies, or alternatively encourage them to engage in diplomacy, which could hasten the spread of peace.  To date his strategies appear to have mixed results.  On the economic front, China and Russia continue to publicly denigrate the U.S. dollar and questions its dominance.  While on the national security front, North Korea, as of this weekend, is threatening to send missiles towards Hawaii.  Additionally, Iran continues forward with its nuclear program and appears to be suppressing the popular support for Mir Hossein Mousavi despite pleas from President Obama to do otherwise.  The U.S. currently represents roughly 25% of global GDP, therefore any major shift in U.S. economic or foreign policy dominance will have a material impact on the global investment landscape.

Themes on the TAIL are not always actionable, but often accelerate into a closer time frame sooner than we expect.  Chasing the TAILs should be part of any proactive risk management process.
Keep your head up and eyes on the tail,
Daryl G. Jones
Managing Director


EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.

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 think Energy works higher if the Buck breaks down.  

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.


EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount Financials (43.10%), leverage we don't want to be long of.

XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.  

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   

SHY - iShares 1-3 Year Treasury Bonds - 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. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

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.

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.


Low hold on slots and tables in May 2008 should allow the total revenue decline in May 2009 to look better than the 11.5% decline in McCarran airport traffic.  Assuming normal holds on tables and slots, we project that Strip gaming revenue will decline only about 5%.  In terms of YoY revenue change, May could be the best month since September 2008.  As a refresher, gaming revenues declined 16% in April 2009 which was the 7th consecutive double digit monthly decline.

Before we get too excited though, our sources indicate that June looks a little weak and the hold comparison is a little challenging.  Las Vegas is not yet out of the woods.


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

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