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CKR - Still in Trouble

CEO Andrew F. Puzder, says this morning “the decline in our same-store sales remains our management team’s primary focus” – it better be!

CKR reported that blended same-store sales declined by 5.0% during period six; an improvement from period five when comparable sales declined 5.2%!  There are not many QSR concepts with same-store sales trends as bad as these. 

For period six, Hardee’s same-store sales declined 3.6%, compared to an increase of 5.7% last year; on a two-year basis, Hardee’s same-store sales increased 2.1%.  Same-store sales for Carl’s Jr. declined 6.1% for period six as compared to an increase of 4.9% last year; on a two-year basis, same-store sales decreased 1.2% for period six.

It appears that a little bit of discounting is creeping into the game plan, but it is not moving the needle on traffic counts.  In period six, Carl’s Jr. began running a limited time 2 for $4 Western Bacon Cheeseburger promotion supported with TV advertising.  If I’m not mistaken, this is using TV to discount one of the concept’s core products – something management said it would never do.  Management is clearly passing some of the benefit of lower commodity costs to the consumer.  Without incremental traffic coming into the door, this is a net negative to margins. 

Industry leading margins and a mid-single decline in traffic are not a sustainable combination.  The only way to get traffic back is to give up some margin in order to improve the company’s affordable perception.  Relative to what we are seeing from other restaurant companies over the past two days, there is little upside to EPS for CKE but rather the downside risk is looking better.  

CKR - Still in Trouble - Hardee s Period 6

CKR - Still in Trouble - Carl s Jr. Period 6


Misguided

"Perceived perception, misguided conception."
-Anonymous

I can't, for the life of me, understand how the manic media still clings to Ben Bernanke and Wall Street strategists for guidance as to what is in store for the US Financial system's future. The #1 risk that remains in this market is the pervasiveness of groupthink.
 
Never mind Bernanke's batting average on inflation forecasting for the last 3 years. YouTubing that would be too embarrassing. Now we are supposed to believe in the perceived wisdom of a man who allegedly knows more about the Great Depression's history than God himself. I have a fond appreciation for history professors - I just don't want them anywhere near managing the risk associated with my family's hard earned capital.
 
Bernanke's perceived perceptions never cease to amaze me. Yesterday, in addressing the potential for reflation to morph into inflation, he talked down Mr. Market's prowess as a leading indicator. He said that as he looks at long term US Treasury rates, "I don't think the financial markets are indicating a great deal of concern about inflation." Yes, fellow commoners - the willfully blind now refers to us non- rear view mirror prognosticators as "misguided."
 
Let's get back to reality here and get 3 things straight when it comes to the market's interpretation of interest rates:
 
1.      Bernanke has the political power of the Almighty to set rates on the short end himself - that's not a market rate
2.      The long end of the curve is marked-to-market
3.      The spread between the short end and the long end = the yield curve; it's also marked-to-market, not Madoff
 
Mr. Bernanke, Given that you and Greenspan have completely politicized the short end of this financial market curve, the only way to monitor the market's concern for reflation/inflation is to look at the spread. The spread between 10-year and 2-year US Treasuries is as wide as it has EVER been. You know this. C'mon man.
 
I will be dedicating the rest of my professional career to You Tubing the perceived wisdom of Wall Street and all those who are hostage to its conflicts and compromises. This is getting so bad, that I have to say it that way. If I were on the ice with Bernanke yesterday, he'd have his jersey pulled over his head.
 
The real people who are "misguided" are those who missed both the -57% peak-to-trough crash in the US stock market from Q407' to Q408', then called for a Depression (at the bottom), and now missed the +41% Q109' to Q309' generational short squeeze. I refuse to put in the reps to play this globally interconnected game and not use that genius technology that every other profession other than Wall Street seems to use called the replay button. I have said my piece.
 
Our Range Rover call was for the SP500 to trade in a range for Q3 of 871 to 954. We are 22 days, or 25% of the way, into Q3. The closing low for the SP500 for Q3 to-date was 879 (July 10th) and the closing high came yesterday at 954.
 
If the SP500 closes above 954, I will guide you to 955... then 956... and yes Mr. Bernanke, you can do this too - then you should stand up at the Senate today and call for 957! Waive your arms and stuff - get a little nuts like a hockey player for the camera maybe. Your seriously misguided conceptions of reality are wearing on me.
 
Many people write off Ron Paul for being a little nutso - and maybe they should. He's a pistol and he definitely doesn't fall in line with Groupthink Inc. While he may be too alarmist at times, he often makes one very simple point - what is it that gives you confidence in your economic predictions and why should we trust you? Fair question Mr. Paul - as a fiduciary of financial recommendation, I think there is responsibility in explaining one's analytical process. History will judge my accuracy.
 
History, of course, is not written by CNBC. The long term tail of this country's economic history is looked back upon long after the fact. In the moment, its our human nature to dismiss evolution. In the moment, the best job security is issued to those who fall in line. In the moment, we allow some of the most reckless abuses of political power that we can never imagine. The long term's unintended consequences of our perceived financial wisdom are what are most often "misguided."
 
Morgan Stanley is out with a call telling you to sell everything today. Then again, that's what their management team has been saying for the last +41% up...
 
Best of luck out there today,
KM


LONG ETFS

CYB - WisdomTree Dreyfus Chinese Yuan-
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

COW - iPath Livestock - This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

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.


SHORT ETFS

 
LQD - iShares Corporate Bonds - Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back.

XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials.

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 of Financials (43.10%), leverage we don't want to be long of.

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

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.  

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.


THE MACAU METRO MONITOR

WYNN RESORTS FILES FOR HK IPO OF MACAU UNIT scmp.com

Wynn Resorts has submitted an application to list its Macau unit on the Hong Kong exchange, hoping to raise between US$500 million and US$1 billion.  Wynn’s plans come as LVS prepares an IPO of its own Macau division.  No decisions have been made regarding the timing or terms of any offering or whether the subsidiary will proceed with the transaction.

 

MACAU AIRPORTS PASSENGERS DOWN 22% IN 1ST HALF YEAR macaunews.com.mo

Macau International Airport’s passenger traffic was down 22% for 1H09, compared with the same period last year.  A statement from the Macau International Airport Company said that “there is the need to prepare for the after-crisis, and CAM has been proactively promoting the airport to airlines in target markets and developing strategic alliances with other airports”.  There is also a planned new service between Macau and South Korea due to start “after the summer”.

 

MACAU’S INFLATION IN JUNE THE LOWEST IN 5 YEARS macaunews.com.mo

Macau’s composite consumer price index rose just 1.1% in June. It was the lowest year-over-year growth rate in five years, according to the Statistics and Census Service (DSEC).  The average consumer price index for the first half of this year grew 2.54% on the same period of last year.  The composite CPI is intended to reflect the impact of price changes on the general population. 

 

MACAU’S GAMING TAX PAYMENTS DROP 10% IN FIRST HALF YEAR macaunews.com.mo

The government income from taxes decreased 10.3% y-o-y to MOP18.51 billion in the first six months of the year. Direct gaming taxes accounted 72.5% of the government’s total revenue in 1H09.  The Gaming Inspection and Coordination Bureau announced a 12.4% decrease y-o-y to MOP51.42 billion in 1H09.  The number of casino licenses – not necessarily all operational – held by Macau’s six gaming operators stood at a record 32 at the end of June.


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IGT: CITYCENTER MAY NOT BE THE POSITIVE CATALYST

The SBG system seems to be having some technological difficulties at CityCenter. We’re also not sure IGT will get its typical new casino market sure.

 

The casino at CityCenter is expected to open in December of this year.  Our sources indicate there are numerous technological difficulties associated with the Server Based Gaming (SBG) system.  Apparently, the system’s compatibility with non-IGT games has been inoperable.  We’ve also heard from other sources that SBG trials at tribal casinos have lacked functionality.  If so, what exactly would casinos be paying for?

CityCenter would be the most important test yet of SBG.  SBG has long been promised as the future of the slot machine business.  Serious operational issues could further delay widespread SBG implementation by years.  IGT needs to get the house in order quickly by fixing the problems and offerering some meaningful applications.

The second potential issue with CityCenter, as it relates to IGT, is slot market share.  Even as its overall market share has declined, IGT has maintained a 50-60% or so ship share into new casinos and expansions.  Unfortunately, IGT may struggle to obtain a 45% share at CityCenter.

We’ve been on the right side of IGT the last few months and still believe that we are about to embark on an extended slot bull market.  However, the near term looks to be pretty rocky.  IGT will report its fiscal Q3 on Thursday and we, like a lot of investors, think they could miss the Street consensus of $0.18.  Other than potential for new markets (Ohio, video poker in IL and PA, and more casinos in IA), there probably won’t be a lot of positive data points discussed on the conference call.  Given the lack of near-term visibility, we don’t expect strong earnings guidance from the company, either.

As we said in our 7/20 post, the right strategy might be to fade the optimism ahead of earnings. 

 



UA: Comfortably Numb?

The data is pretty clear -- negative reports on near term trends at UA are indeed having less of an effect on UA shares (best measured as relative to the MVR index). The first chart represents the performance of UA shares relative to the MVR over the 2-day period after a negative research note. Tough to miss that relationship. As you can see from both the trendline as well as the higher lows, the market is increasingly shrugging off incremental bearishness.

 

Casey Flavin

 

UA: Comfortably Numb? - UA Market Reaction to NegReports 7 09

 

UA: Comfortably Numb? - UA Reaction to SS


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