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Restaurant Industry – Feeding the Homeless

Any concept can drive strong top-line results with increased marketing initiatives that are focused on communicating the concept's compelling value proposition. Nearly 100% of the time, the increase in same-store sales does not come without cost - increased traffic with its value message at the expense of average check and restaurant margins. While the increase in sales might be good for the Franchisor, the operational complexities associated with extreme discounting can be a net negative.

The recent Kentucky Grilled Chicken promotion from KFC is a classic example.

What do you think McDonald's can expect with its new Mocha Mondays promotion? McDonald's is offering a complimentary 7 oz. Iced Mocha or indulge in an 8 oz. Hot Mocha each Monday from 7 a.m. to 7 p.m. at participating McDonald's restaurants from July 13 through August 3.

According to McDonald's "This is one of the largest sampling initiatives we've taken on as a company." It's going to be very interesting to see how this plays out for MCD.

Burger King Holdings Inc. (BKC) appears to be headed down a similar road. The Burger King operators shot down a plan to sell double cheeseburgers for $1 nationwide. Those operators understand the consequences of this move.

The marketing muscle behind these value messages by the larger chains will hurt the little guys more. In this context, CKR will continue to see pressure on its industry leading margins.

Restaurant Industry – Feeding the Homeless - mochamonday

Retail Second Look: Closing The Loop

I just got an email response from a subscriber who asked if I would tie all my thoughts together from this morning's First Look post on China vs. the US. The wording was kind, but what he really meant was... "C'mon McGough...Throw me a bone. Your macro analysis doesn't do squat for me if you don't tie it back to an investable theme."  Fair point.


I admit that sometimes I get too hung on up the big picture. The crux of my First Look China comments were as follows...

As exports go up due to government stimulus, then FOB (delivered price of goods in question) comes down, and the balance of power in the fight for margin dollars shifts to the US part of the supply chain.

I had been (and still am) concerned that as exports kick up, it could come at the expense of local consumption in China, therefore hurting multinationals with large China presence. That is not yet happening.

The key to watch out for now is whether increased export activity overshoots demand and we're left with a stuffed channel in 2H. That's definitely not the '2Q is a slam dunk' consensus call.

I don't think we'll see that, but as always will stay intellectually honest in evaluating the data.

I still think the big call is that we'll see a divergence between quality and junk starting in 1Q10.



While the US Retail mafia is drilling down how many pairs of cargo shorts Abercrombie sold last week, and whether 'skinny jeans' are 'trend right' as we look toward back-to-school, there are a few much bigger picture points worth kicking around - and both were supported by data releases out of Asia over the past 24 hours.


  • First, did anyone notice that passenger car sales in China were up 48% last month? We're not talking about a little piddly low ticket item here, folks. China is on track to pass the 11mm unit threshold this year. Importantly, domestic Chinese passenger automotive sales are outpacing commercial sales, and sales in total are outpacing production growth by a significant measure.This is the real deal.


  • Second, this morning China printed another sequential (month over month) improvement in exports alongside the 4th straight monthly gain in Chinese home prices.


What does this mean? Home prices heading higher alongside improving auto consumption trends clearly augers well for the state of the consumer. But the fact that this is happening in conjunction with an improvement in exports is noteworthy.  You've heard me talk about how the Chinese are exerting their inner capitalists by using changes in the VAT rebate structure to flex manufacturing capacity available for export. We started to see such activity (higher VAT rebates) three months ago, and we're ALREADY seeing factories reopen and exports tick up.






Some Notable Call Outs


  • By this morning, June same store sales results are old news. However, it's worth noting some trends from the month. From a product category perspective, dresses and footwear were the most often mentioned positive callouts (same as May). As expected, seasonal categories in both apparel and non-apparel were the weakest for the month. In the non-apparel categories, home, domestics, and housewares were mentioned as either having overall positive comps or were highlighted as categories that showed improving trends. Food and consumables also remained strong, despite deflation in meat and produce. Regional performance was mixed, with no prevailing trend.


  • Luxury retailers including Saks reported another challenging month with no underlying pick -up in demand. To further illustrate the weakness, Barney's just broke its third markdown of the spring/summer season for total savings up to 70% off original prices. While inventories are much tighter across the luxury channel, it appears that the level of discounting is approaching similar levels last seen over the holidays.


  • Retailers were quick to remind us that the back-to-school season will be later this year, which will negatively impact July results. Expect a calendar benefit in August as school start dates fall later this year vs. last. With consumers historically waiting later and later to make back to school purchases, this year's calendar set-up has the potential to stretch out the selling season even further.


  • Only three weeks after Michael Jackson's unfortunate death, retailers are preparing for a wave of products to hit the shelves. The speed to market is noteworthy given the expected breadth of items to be released. However, the timing is purely coincidental as the large merchandise program designed by Jackson was already in the works as he prepared for the London comeback tour.




Household Spending Remains Strong in China - Ikea, the world's largest home- furnishings retailer, is seeking a suitable site to open a second store in Beijing to meet rising demand as household spending increases in the world's most populous nation. The second Beijing store will likely be larger than the first, which covers about 42,000 square meters (452,084 square feet), she said.  "We typically build a store from the ground up, instead of leasing from an existing location," according to Xu. "We're now looking for a suitable location that will allow us to construct it this way." China is promoting local consumption to boost economic growth and counter a slump in exports after global demand worsened. Chinese retail sales rose 15 percent in May, the fastest pace in four months, government data showed. The new Beijing store, should Ikea decide to proceed with the investment, will be its tenth in the country, Xu said. The retailer has seven stores in China, and is building one in the northern city of Shenyang and another in Shanghai, she said.  <bloomberg.com>


Activewear Company Sues Nike Over MJ HOF Induction Related Apparel - Not everyone is excited about Michael Jordan's induction into the Basketball Hall of Fame this summer. SportsFuzion Inc., an activewear firm based in Massachusetts, has filed a suit in the Massachusetts Superior Court in Norfolk, accusing Nike Inc. of fraud, contract interference and other violations for the Hall of Fame collection its Jordan brand is planning to commemorate the induction. SportsFuzion contends that, in 2005, it created the concept and detailed marketing plan around a product line for Michael Jordan's induction to the Hall of Fame. "Having Nike and the Hall of Fame go behind our backs to cut us out of the deal has become my worst nightmare," Andrew Mirken, president and co-founder of SportsFuzion, said in a statement. The firm, which has held a license for Basketball Hall of Fame apparel since 2006, also names the Hall of Fame as a defendant in the suit.  <Women's Wear Daily>


Premium Denim for the Youngins - Cherokee Inc. wants to resurrect the spirit of the counterculture. The Van Nuys, Calif.-based licensor will reintroduce A. Smile, a young men's and juniors denim-based line that had its heyday in the Seventies. Cherokee has tapped Graj + Gustavsen, a branding firm, to help it in its efforts to reintroduce the brand and make it relevant to today's consumers. The brand spoke to the hippie generation with its styling and marketing, which included an ad of a donkey wearing a pair of jeans that read: "Put a smile on your ass." In similar news, Joes Jeans just entered a new license agreement with Kids Jeans to provide premium denim for infants, girls and boys.  <Women's Wear Daily>  & <DJ Newswires>


eBay Looks to Loosen EU Competition Laws - In a new bid to lift what it sees as unfair barriers to online trading, eBay on Thursday sent all its users in Europe a petition urging the European Commission to amend its competition laws. EBay hopes the support of its vast customer base will help persuade the commission as it considers whether to change legislation governing online retailing when regulations expire at the end of 2009. "We are asking all our eBay customers in Europe to sign our online petition against online trade barriers," a spokeswoman said. "This, in turn, asks European decision-makers to amend an European Union competition law in order to make it harder for certain brands and manufacturers to block the sale of products on eBay and other market places." Existing regulations allow for selective distribution - the right that brands have to choose where and how their products are sold. In its e-mail to customers, eBay argued some brands unfairly prevent the sale of their products by contending that the online world is fertile ground for counterfeit goods. EBay said only 0.15 percent of posts on its site have been detected or signaled as presenting a counterfeit risk.  <Women's Wear Daily>


Sports Equipment Update - Sales in athletic sports equipment, apparel and footwear were flat for 2008 after a 4 percent rise the year prior, according to a recent report.  The NPD Group's Global Sports Estimate 2009 report showed that 1 percent declines in sales in Europe and the Americas were offset by growth in Asia, where sales rose 4 percent (led by China, with a 15 percent jump), and in the Middle East and Africa, where sales were up 7 percent. Running, walking and hiking, swimming, cycling, the workout/fitness category and soccer all saw gains in market size, while golf, basketball and tennis shrank. Apparel decreased 1 percent globally, with footwear flat for the year worldwide, despite a 3 percent decline in the Americas. Looking ahead to 2009, the Port Washington, N.Y.-based research group's report forecasts sales declines driven by the economy in China, with the European market trending toward private-label expansion and manufacturer consolidation. <Women's Wear Daily>


Juicy Out of Madison Ave. - Juicy Couture is abandoning Madison Avenue, reflecting hard times and high rents along the posh Manhattan retail venue.  The division of Liz Claiborne Inc. has been paying $2 million in annual rent for its two-level, 3,300-square-foot store at Madison and 70th Street.  "It's been a lot to pay," said Edgar Huber, Juicy Couture's president. "The lease was signed at the height of commercial real estate in New York. Landlords will have to bring down prices. Nobody will be willing to pay them."   Rents on Madison remain high, though they have begun to decline. As of last spring, rents were down 8 percent to $979 per square foot from $1,066 in 2008, according to the Real Estate Board of New York.  In addition to the rent, Juicy Couture's business on Madison has been hurt by slower customer traffic as consumers pull back on apparel purchases. In addition, the brand, known for its upscale, girly, contemporary clothes, opened a glitzy flagship on Fifth Avenue and 52nd Street. "People prefer the big store on Fifth Avenue, which is doing extremely well," Huber said. "The Madison location became a neighborhood store, not a high-traffic store. It was never extremely strong for us. It's important to have a store on Madison. It's prestigious, but $2 million [in rent] is too high. Our average transaction is not as high as our neighbors."  Huber said the Madison Avenue closing is "an exception" to the company's strategy of opening stores. The location is being marketed by Juicy Couture and its brokers.  <Women's Wear Daily>


Christmas Comes Early to Sears and Kmart - The retailers owned by Sears Holdings Corp. decided they don't need snow, pine-scented trees, deeply discounted merchandise or any other harbingers of the holiday to sell Christmas products in July. Christmas Lane, a pre-holiday program, runs from July 5 to 25 on the Sears Web site and in 372 Sears and Kmart stores. With consumer spending down in the recession, Hoffman Estates, Ill.-based Sears Holdings is offering shoppers "a jump start" and several financing options, including layaway and zero percent financing," a spokeswoman said. "This enables them to spread out payments over a certain period of time. They may be able to buy more in the end."

 <Women's Wear Daily


M&S and Primark Spitting Match - Marks & Spencer executive chairman Sir Stuart Rose said at Wednesday's AGM that it was impossible to sell a t-shirt in the UK for £2 while covering business costs and paying a "fair and living wage to the person who made it". The comment was taken as a thinly veiled attack on low-price specialist Primark. But yesterday, when Primark-owner ABF updated on trading, group finance director John Bason said it shared some suppliers with M&S. "Sometimes people think Primark sources from people different to everyone else on the high street," Bason observed. He said 98 per cent of its top 250 suppliers also supply other high street names. Anti-poverty campaigners said M&S was being hypocritical. War on Want senior campaigns officer Simon McRae said: "This underlines the systemic problem that no British fashion retailer can guarantee a living wage and decent conditions for garment workers." <retail-week.com>


Blue Jeans Bandits Caught - Police arrested 11 suspected "blue jeans bandits" after they were discovered cutting tags off about $10,000 worth of stolen merchandise in the backyard of a southeast Atlanta home. Most of the merchandise, which included hundreds of pairs of jeans as well as shirts, still had labels and security tags, said Sgt. Lisa Keyes, a police spokeswoman.  The suspects - three adults and eight juveniles - are believed to have been involved in a series of robberies in the Atlanta metropolitan area that have resulted in the loss of premium denim and sportswear worth an estimated $1.5 million. More than 70 retailers, including Macy's at the Lenox Square mall, have been hit in the last two-and-a-half years. Police dubbed the gang the "Blue Jeans Bandits."  <Women's Wear Daily>


Scoop on the Ropes - Scoop NYC, the contemporary retailer created 13 years ago as "the ultimate closet," is under increasing financial pressure. Several factoring companies have stopped giving Scoop credit and approving orders. The chain, which was purchased about two years ago by billionaire Ron Burkle's Yucaipa Cos. LLC, is said to be undercapitalized and has been slow in paying its vendors, according to financial sources.  "Some designers will ship them regardless, but we have not approved them for quite some time - since September 2008," said Gary Wassner, president of Hilldun Corp.  "They're unresponsive in their accounts payable department," Wassner added. "They're not cooperative. They're not providing any financial information to make any kind of analysis of how they're doing. In today's market, it's important to be transparent." He said other factors in the market are not approving the retailer either, citing Rosenthal & Rosenthal, CIT Group, GMAC and Wells Fargo. <Women's Wear Daily>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):


07/09/2009 11:07 AM


Re-shorting our view on US Consumer Discretionary, on an up day... Short green. The intermediate term TREND in this US Sector View remains broken. KM






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ADELSON KEEPS THE SHOW ON THE ROAD destination-macau.com

Both Destination Macau and The South China Morning Post cited Sheldon Adelson as saying, "we're actively, aggressively, sincerely looking at an IPO".  Speculation has been rife recently that LVS was set to raise US$2billion from a Honk Kong listing, one of several capital-raising options that the company may undertake in the hope of raising up to US$4billion to bolster its balance sheet. 

Sheldon and his wife who hold a 50.15% stake in the firm, no doubt feel that the business is dramatically undervalued and may be about to wager that Hong Kong investors will feel the same way. Executives in Singapore told Bloomberg that the company would decide this month whether to proceed with a local share sale of a stake in its Macau business.

Some of the most successful recent Hong Kong initial public offerings have commanded very attractive valuations. Mainland sportswear firm 361 Degrees International sold shares last month in a deal that valued the company at 25 times the most recent year's net profit. By comparison, the Hang Seng Index is currently trading at 16 times earnings.

From a timing standpoint, there are still some big hoops to jump through including getting the Macau government to approve the listing of Macau assets on the Hong Kong stock exchange. Other obstacles include noise that has been made by Stanley Ho and others about Macau assets being stripped for cash to use overseas, political agenda of the new CE in waiting, and approval from Macau lenders.

Speculation of use of proceeds includes: US$2 billion to finish Lot 5&6 in Macau, and US$2 billion to pay down debt at the parent level - which would also allow cash to be injected into the Singapore project (about US$500 million is still needed, according to original estimates).

MACAU IN SHUHAI destination-macau.com

The University of Macau's new campus is to be built on Hengquin Island, surrounded by a moat, and linked by tunnel to Cotai.  It will take three years to complete and will be operated by the Macau authorities. It will be interesting to see what else this new initiative of cross-border cooperation can bring. 

THE RUSSIANS ARE COMING destination-macau.com

The game of Russian Poker has been applied for registration with the DICJ, so that Macau casinos can begin to offer it.  Macau could be the new gaming destination of choice for Russian tycoons given the recent crackdown on casinos by the Kremlin. 

DM writes that one Macau casino is said to have discussed the possibility of a Russian-dedicated VIP room with one Russian group. 

You Might Have Heard

"If you are out to describe the truth, leave elegance to the tailor"
-Albert Einstein
Earlier this week I titled an Early Look "The Truth", and I'd say that it inspired the highest level of thoughtful responses that I've had on a note in quite some time.
The feedback mechanism associated with our making a call on markets every morning is fantastic. While I was on the buy side no one with a real thesis would give me the kind of real-time information that I get now (they'd buy/sell their position, then tell me). Being at the hub of an exclusive network is tremendously additive to our fact finding mission. We want the truth, not a political confirmation bias.  
The takeaway from the latest feedback that I have been getting is quite simply that investors are very much politically and emotionally charged right now. Trust in the US Financial System is becoming a secular issue. Obama has big ears, so he better hear this - and "get it", because confidence is what economies and markets are built on, not rhetoric. China is up +70% and the US down -2% YTD, respectively, for many reasons - but the delta in confidence is a major one.
Consider the following two comments that are hitting the wires this morning:
1.      "History provides numerous examples of non-independent central banks being forced to finance large government budget deficits... further increase the burden of the national debt on current and future generations" -Don Kohn (US Federal Reserve President)

2.      "Despite whatever talk you might have heard, I don't see that there is movement away from the notion of the dollar being that currency" -Robert Gibbs (US Press Secretary)

Forrest Gump might read those two comments as:
1.      The Fed is politicized, not independent as it was intended to be - and there will be unintended consequences associated with that, in the end

2.      Hey, isn't that John Kerry's press secretary from 2004? When did he start doing macro?

Credibility in any financial system starts and ends with the truth. If you don't have credibility, you sponsor volatility. If you sponsor volatility, you are signing off on emotion. If you're making decisions emotionally, I call that a reactive risk management process.
What "you might have heard" is that the US Government is Burning The Buck. Because they didn't want to proactively address the truth of the global macro matter, now they are on the defensive. Obama's ratings are falling fast. Shaking hands with Gaddafi last night probably won't improve that over the weekend either.
Main Street America isn't as stupid as what you "might have heard" from Washington or Wall Street. Americans know where their bed is at night, and they know darn well where there money is in the morning. If you burn their currency, they don't have to hear it - they see it.
YouTube is a metaphor for the transcending trend of transparency. Obama crushed the Clintons with that, and now he and his economic team are hostage to it. It's a global macro factor that is as relevant as any right now. That's not a political statement. That's how The New Reality works.
When it comes to Burning The Buck, "you might have heard" that some people are getting paid. I call them the Three Little Pigs - it's a children's story, so it's very easy to understand:
1.      Politicize/Socialize your financial system and currency
2.      REFLATE things priced in Dollars by devaluing
3.      Bankers, Debtors, and Politicians get paid

Despite a non-qualified US economic official who has decided to give his opinion on this and suggest that "I don't see there is a movement away from the" US Dollar, doesn't mean that the rest of the world is paid to be as willfully blind.
As the Buck Burns, and everything priced in those dollars pays the conflicted aforementioned constituencies, who loses?
1.      China
2.      US Savers
3.      The Dollar

The feedback I get is that people do in fact see and hear. Amazingly, some people can do even both at the same time.
"You might have heard" this morning that China continues to walk away from this Crisis of Credibility and control their own destiny. This morning's economic data out of China shows another sequential (month over month) improvement in exports alongside the 4th straight monthly gain in Chinese home prices. While I am sure that Alan Abelson and the Barron's boys are teeing themselves up to have a "China Bubble" cover sometime soon, "you might have heard" that Barons and CNBC aren't the places that helped you avoid the US stock market crash of 2008 and the generational short squeeze of 2009.
My intermediate term TREND line of support for the SP500 remains 871, and my long term TAIL line of resistance remains 954. US Equities have moved to my lowest Asset Allocation across the options that I have globally. You might have heard that other people don't have to invest in things they don't trust either.
Enjoy the weekend with your respective families,


USO - Oil Fund-We bought USO on 7/6 and 7/8 on a pullback in oil. With the USD breaking down, oil should get a bid.  

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 and added to the position on 7/7 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.   

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.

XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/29.  Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

EWJ - iShares Japan -We're short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY - SPDR Consumer Discretionary - We shorted XLY on 7/9 on a rip as our team has turned negative on consumer.  

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.

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.   Added to the position on 7/1, as our stance on the consumer is no longer bullish like it was in Q2, when gas prices and mortgage rates were dramatically lower.

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.


In our 6/21/09 post "MAY STRIP REVS SHOULD LOOK BETTER THAN THE AIRPORT #S" we predicted a 5% decline.  As announced yesterday, Strip revenues actually fell 6%.  We could've done better.

The takeway here is that May wasn't bad but did benefit from an easy comp.  In May 2008 gaming revenues fell 16% driven in part by low hold % on both slots and tables.

Despite the excitement following the release of May numbers, Las Vegas is not getting better.  The June comp is difficult, down 3% in 2008, and anecdotally we are hearing a theme of softness.  Here is the trend:



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