The Big Get Stronger

We’ve been hitting on improved fundamentals in Europe in recent posts and today’s European PMI numbers continue the positive trend we have been watching develop.  Critically,  PMI readings for the German service and French manufacturing sectors released today for August crossed the 50 threshold, which indicates expansion.  According to Markit Economics the German service sector rose to 54.1 from 48.1 (far exceeding forecasts of 48.6) and French manufacturing rose to 50.2. German manufacturing and French services also improved sequentially but stayed in contracted territory at 49.0 and 48.9 respectively. 


As we’ve been reiterating in recent weeks, we believe that the improvement in Europe’s larger economies will greatly benefit other parts of the region due to the interdependent of trade within the EU. Clearly the improvement in German and French PMI as the Eurozone’s largest economies that each posted Q2 GDP growth of +0.3% quarter-on-quarter helped lift the composite Eurozone PMI to a 15-month high at 50.0.


Today Keith made a tactical sale of our position in Germany (EWG) in our model portfolio, with the ETF up ~3.9% as the DAX traded at ~1.8% at the time of the sale. European indices reacted positively to the PMI numbers, up 2-3% across the region. Despite the improved fundamentals we still see slow growth across Europe ahead, with relative winners and losers on a country basis. Our bullishness on Germany remains in the intermediate term; look for us to buy back Germany on a down day.


Matthew Hedrick


The Big Get Stronger - a1



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

Early Look

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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


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.



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