Today, the NAR reported that sales jumped 7.2% to an annual rate of 5.24 million homes, the highest since August 2007.  Consensus expectations were for a 5 million unit pace. Compared to July last year, sales rose 5.0%.


(continued after chart)




Since our 2Q housing call, all of the housing data points continue to indicate the housing market is turning after three years of continued pressure.  The one sticking point continues to be high unemployment, which continues to put real consumer demand into question.  It should not be forgotten with today’s good news that yesterday the Mortgage Bankers Association reported that LATE mortgage payments jumped to a record high in 2Q09, with almost one in eight homeowners delinquent or in the process of foreclosure.


Where do we go from here and can it get much better?  Here are my thoughts on that question!


(1)   THE PEAK SEASON - For those consumers with “need based” moves, it’s August and the kids will in school soon, if they aren’t already.

(2)   INTEREST RATES - Interest rates are headed higher in Q4.  See Keith McCullough’s note on “Bernanke Pandering” and you will get the picture.

(3)   THE GOVERNMENT - The Government home buyer stimulant is going to end.  The deadline to close a home purchase is November 30, 2009. The process of buying a new home is not quick and easy - finding a home, lining up financing and getting inspections and closing, all takes time to accomplish.


Howard W. Penney

Managing Director


Bernanke Panders, Again...

A picture is usually worth a lot more than my prose, and I have attached an important one below. The picture is from Getty Images, 4 weeks ago – FDIC Chairman, Sheila Bair, looks at Bernanke much the way that I do right now. I think that look on her face is a metaphor for how Americans feel about their Burning Bucks. The Debtors, Bankers, and Politicians are getting paid here. Americans are footing the bill.


Ben Bernanke’s 10AM EST comments out of Jackson Hole delivered exactly what the US Dollar bears ordered – more of the same conflicted compromise for America’s currency. Under the veil of a ridiculous narrative fallacy that this country is experiencing a “Great Depression”, Bernanke is overseeing a monetary policy that is as politicized as this fine country as ever seen. It’s sad.


In his speech, he seemed to be reflecting more on his personal history books about the Great Depression and how he seriously believes that he and this government prevented one. As ridiculously self serving as that is, at the same time he said we are emerging from a “deep global recession.”


Depression or recession? Global or local? How do you go from Great Depression to recovering from a recession?


China is running double digit GDP here in Q3, and Australia’s economy has barely budged to the downside. There was no global economic depression. There was a conflicted constituency of levered long financiers who were depressed. That’s why the only countries with interest rates at an “emergency rates of ZERO” are Japan and what was once the fiduciary of the world’s reserve currency – the United States of America.


In the immediate term, it has paid to be able to proactively predict these American politicians. Buying everything based in bucks has reflated. In the intermediate to long term however, this will not end well.


I have been a buyer of this market’s manic behavior on down moves. Today, I am selling rather aggressively…



Bernanke Panders, Again...  - bernanke21


Back in late November, I wrote a post titled “Building A Case for Casual Dining in Early 2009” in which I highlighted the following catalysts/themes that would work their way into the market in the early part of 2009:


(1) Currently gas prices are nearly 40% below last year’s level and likely to stay there for some time.
(2) There is a broadly accepted and recognized need for massive fiscal stimulus in early 2009.
(3) Reductions in restaurant capacity in 2009, especially in the bar and grill segment.
(4) The decline in commodity prices provides a backdrop that can help mitigate the decline in margins.
(5) Valuation


Outside of top-line trends, which have retreated to 4Q08 levels, these five catalysts remain the primary drivers of the casual dining group’s stock performance.  The only differences now are prices and the fact that these catalysts for the most part will become industry headwinds.


(1) Gas Prices

As I said earlier this week (please see post titled “Gas Prices – Q4 Inflation”), gas prices have been extremely favorable on a YOY basis for restaurant companies this year (down 38% on average in 1H09).  Looking at the chart below, this YOY cost benefit will start to moderate and could go away in the fourth quarter.  If gas prices stay at their current level (though they typically decline after the peak summer season), they will be up on a YOY basis come early November.





(2) Fiscal Stimulus and Casual Dining Demand


The bullish case for Casual Dining and Restaurants in general is that easy same-store sales comparisons going into 4Q09 will help the stocks.  Casual dining same-store sales growth became less bad in 1Q09, but July levels are not much better than what we saw in December on a 2-year average basis.  We still need to see a pick-up in job creation before we will see a real turnaround in dining out trends, and the visibility on that happening anytime soon is murky.   And, yesterday’s job news supports this thesis.  Yesterday, initial claims rose 15K to 576K in the week-ended August 15th, marking the second straight increase and ahead of consensus expectations of 550K.  In addition, the four-week moving average rose to 570K from 566K in the prior week, the highest level since mid-July.   


(3) Capacity Reductions


New unit growth has come down in 2009 and development related costs have come out of the P&L.  By focusing more on in-store unit economics, the casual dining restaurants as an industry have created much leaner and more efficient business models, which have helped to sustain margins in this challenging sales environment.  The majority of the casual dining operators will not re-accelerate growth in 2010 so development related costs should remain low, but as they lap the implementation of these cost saving initiatives, it will become increasingly more difficult to grow margins with negative same-store sales growth. 


The YOY margin growth trend we saw in 1H09 is not sustainable with continuing declines in comparable sales growth, particularly 7%-plus declines as we experienced in June and July, as measured by Malcolm Knapp.


CASUAL DINING - NOW AND THEN - CD margins vs SSS growth 2Q09


(4) Commodity Prices

Looking at the chart below, lower food costs helped to mitigate casual dining margin declines during the first half of 2009.  Like gas prices, the YOY food cost benefit will moderate in Q3 and most likely go away in Q4.  The second chart below shows 2007, 2008 and 2009 food prices as measured by the Commodity Research Bureau (CRB) Foodstuffs index, an index based on the prices of hogs, steers, lard, butter, soybean oil, cocoa, corn, Kansas City wheat, Minneapolis wheat and sugar.   Food prices initially turned favorable in 4Q08 on YOY basis and remained so in 1H09.  At current levels, food prices will be up on a YOY basis come 4Q09.  Of course, not every company will be impacted immediately, due to the fact that many restaurant companies have long-term contracts.  That being said, as we head into the third and fourth quarter earnings seasons the commentary from most management teams will be to not expect the same benefits in 2010 as there were in 2009.






(5) Valuation

The biggest delta between now and late November when I wrote “Building a Case for Casual Dining in Early 2009,” however, is price.  Year-to-date, casual dining stocks on average are up 80%.  The group on average is trading at 6.6x on an EV/NTM EBITDA basis relative to 4.4x on November 30, 2008.  The casual dining industry is not going away.  It is a cash rich business, but sales trends will remain soft in the near-term, putting increased pressure on margins.  The group's trading performance on average is flat in the last 3 months, but relative to upcoming catalysts, the risk/reward associated with these casual dining names seems to lean to the downside.


One more difference between now and then is my competitors’ ratings of the casual dining companies.  Overall, analysts are still more bearish than bullish, but they are marginally more bullish today than they were then.




CASUAL DINING - NOW AND THEN - CD Analyst ratings Today


November 30, 2008


CASUAL DINING - NOW AND THEN - CD Analyst ratings Nov 30


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KSWS: Yet More Indication That Bottom is Past

Here's a quote from Foot Locker's conference call. It speaks volumes to tust one sliver of upside to the K-Swiss investment thesis.


"I don't think we bought enough of the moderate priced product. And I think, you know, if you don't have sufficient amount of product to offer the consumer, you're not going to sell it. So in my view, I think we need to step on the gas a little in that zone and do it profitably from an off-price method, not just take it out of our hyde. We always had very successful two for 89 programs around here. That kind of dissipated a couple years ago. We had the merger of Reebok with Adidas, and we had a huge, huge business in that white shoe product, as well as with K-Swiss. Those heavy sole, whatever you want to call them, tennis shoes, shopping shoes, I think some of our competitors have taken that business from us, and that we need to be a little more aggressive in that area. Actually, I take it back. We need to be a lot more aggressive."



Revenue figures for the first eighteen days of August have shown that the Macau gaming market is on track to break its record month of January 2008, when it earned MOP10.4 billion, according to DM.  Ominously, however, the Liaison Office of the Central Government’s Zhuhai branch has reportedly set up a special division to monitor the link between the mainland’s fiscal stimulus program and gaming revenues in Macau.

DM sees the VIP customers as being the likely target of any action by Beijing; they are most responsible for bringing all those revenues to Macau.  The junket business is ferociously competitive and constantly evolves as political and economic winds change.  DM believes that the current environment is working favorably for the junkets and their ability to extend credit and keep business coming to their VIP rooms.  However, it certainly won’t last forever, which is all the more reason for junket operators to take full advantage of the current credit splurge. 

Upcoming events in China that are worth keeping in mind include: the 60th anniversary of modern China on October 1 and the 10th anniversary of Macau’s return to the motherland on December 23rd (also the day when the new chief executive takes office).  DM believes Beijing will allow some time for the new CE to settle in, and for these big parties to pass, before any possible tweaking of visa restrictions.




In light of Dr. Stanley Ho’s illness, rumors are surging through various media outlets guessing what his condition is and who, if needed, will replace him.  Many family members will be involved in any future debate over Ho’s assets.

It is more likely that they would fight over control of STDM, and therefore SJM, than over money.  Controlling STDM is about power and influence; it is a relatively minor component of Dr. Ho’s financial empire.  Pansy and Lawrence, the two most likely successors, are both already concessionaires in Macau and will not be allowed, by law, to take over STDM while maintaining their current positions.  DM believes that Pansy could get bought out of MGM or Lawrence Ho could possible try to merge Melco-Crown and SJM, (seen as his position with Melco-Crown is valuable given the company’s land and VIP market share).  

There is a lack of legislation in Macau to cover any of these scenarios, which is why Fernando Chui Sai-on has a difficult job ahead should Dr. Ho not recover.




Analysts have recently published bullish reports on Singapore’s potential as a gaming market, with estimates suggesting that its two casinos would be able to generate about US$3 billion in winnings per year.  That would be just under 25% of Macau’s thirty-two properties’ revenue in the twelve months to June 2009 and just over half of the US$5.66 billion that forty-one casinos, slot halls, and bingo parlors on the Las Vegas Strip generated in the same period. 

At nearly US$6 billion each, the Marina Bay Sands and the Resorts World Sentosa will be two of the world’s three most expensive casinos (after MGM’s CityCenter at US$9 billion). 




The biggest shareholder of Wynn Resorts is now Kazuo Okada’s Japanese pachinko operator Aruze.  Mr. Okada now owns 19.9% of the company. Chairman and chief executive Steve Wynn now owns 18% of the company after selling down two million shares at US$57 per share to raise US$114 million in cash. 

The Wynns are getting divorced and, according to a statement from the company, “the shares were sold to provide liquidity in anticipation of the change in their marital status”. 




The Macao Daily reported that discussions between the Chairman of the Macau Tourism Council, Wu King Kong, and local tourism agencies  have indicated that Guangdong will relax travel restrictions to Macau to once per month starting on September 1.




Filipino and Indonesian maids in Macau are campaigning against a bill that would ban them from the city for six months if their contracts are terminated.  The bill also features a levy on employers of all imported workers.  Lawmakers will debate the bill in the next few months.



Crash Callers

“Only the wisest and stupidest of men never change.”
This has been a fascinating, yet consistent, week. As sure as the sun rises in the east, you’re going to continue to see the market’s CNBC meme machine freak-out whenever we see a downtick. This glaring groupthink remains the asset for domestic bulls and, importantly, it went global this week with China.
Today, the crash callers of everything they missed (or trying to sell bearish books on) are staring at the 3rd consecutive up day for the US stock market, and a straight up 2-day move in Chinese equities.
One of our best risk managers at the firm, Andrew Barber, wrote a thought inspiring Chinese sentiment piece yesterday. I won’t regurgitate that this morning, but I will show in his Chinese river card. China closed up +1.7% last night, taking its two-day “shame on you for doubting us” rally to +6.2%. For all of those out there keeping score on gold medal performance: the Shanghai Composite Index is +62.6% YTD (-14.7% off its highs) while the SP500 is +11.5% (-0.49% off its highs).
This business has a sneaky way of making the “smartest” of Wall Street savants look silly. It’s a good thing no one ever accused me of being “smart”! That’s what the sell side gets paid to call their clients. I’m just another ex-hockey player grinding it out here on the early shift with my team.
Grinding works. So we’re going to stick with the game plan. As the US government Burns The Buck, everything priced in those bucks is going to continue to reflate. Erik Shatzker (Bloomberg), who I think is one of the most analytical synthesizers of everything global macro, asked me yesterday if this can continue to persist. I said, simple is as simple does. And with the US Dollar down again yesterday, yet again US stocks were up.
The only thing more dangerous than taking financial advice from a Canadian hockey player (or in Erik’s case Canadian media mogul), is taking it from guys who can do math and say “eh” at the same time! As the math changes, I do. I may not be the wisest or the stupidest risk manager in this market, but through trial and error at least you can depend on me to change.
Back to the Burning Buck (which is down another -0.47% this morning and threatening to break down through a critical level of support), you can depend on Ben Bernanke not changing this morning in Jackson Hole. At 10AM EST, he’ll pander. That’s what global currency traders are betting on, and I think they’ll be right.
As Bernanke panders to the most politicized monetary policy this country has ever seen, the Buck will Burn. For all you weekend warrior crash callers, take a look at this one: USD down -12.5% now since March – for the “world’s reserve currency”, now that’s a crash!
Of course, nothing draws a crowd to this business like something in the rear-view mirror. This morning we can add 2 more highly visible US based market economists to our year long Breaking/Burning The Buck Macro Theme: Mohammed El-Erian (PIMCO) and Joseph Stiglitz (Columbia University). Here’s what they said:
1.       El-Erian: “The question is not whether the dollar will weaken over time, but how it will weaken… The real risk is that you will get a disorderly decline.”
2.       Stiglitz: “The current reserve system is in the process of fraying… the dollar is not a good store of value. Right now, the dollar is yielding almost no return and yet anybody looking at the dollar has to say there’s a high degree of risk.”
So now the crash callers can’t ignore this. All in the same week, we’ve had Buffett, PIMCO, and Stiglitz come out explicitly with our call of The New Reality. In the immediate term, this will continue to be bullish for anything priced in dollars. In the intermediate term (3 months or less) consensus will morph into concern (inflation). In the long term, “King Dollar” will be dead.
No, I don’t mean dead, like going away dead. I mean dead as in being so dominant as the owner of the world economic debate. A strategy of creating limitless credit at the sign of every economic downturn in our home currency is over. Don’t freak out about it, just understand it, and deal with it.
Come Q4, Bernanke’s financial forecasting fallacies will be You Tubed for the umpteenth time. When he speaks in Jackson Hole this morning, think back to what he thought he saw coming down the pike at this same Federal Reserve retreat in August of last year. It’s professionally embarrassing. Even Main Street America gets this now – it’s time President Obama does too. Time to change, big man.

In the ABC/Washington Post poll this morning,  “49 percent now express confidence that Obama will make the right decisions for the country, down from 60% at the 100-day mark in his presidency… 49% now say they think he will be able to spearhead significant improvements in the system, down nearly 20% from before he took office…”

Americans aren’t all the wisest or the stupidest. As the Buck Burns, the Bankers, Debtors, and Politicians get paid. Americans don’t. And as the stock US stock market tests new year-to-date highs this morning, we’ll all just have to sit back and think about that…
I have immediate term TRADE resistance for the SP500 at 1,019… what was yesterday’s resistance now becomes your support. That line is 999.
Have a great weekend with your families,


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 reflation call.

XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy, which posted a positive Q2 GDP number.

XLV– SPDR Healthcare Healthcare has lagged the market as investors chase beta.  With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.

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.

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.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

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.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.

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.

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

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