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The S&P/Case-Shiller Home Price Indices are calculated monthly and published with a two month lag.  It was reported today that the Standard & Poor's/Case-Shiller's U.S. National Home Price Index rose nearly 3% in 2Q from 1Q.  In January we predicted that the housing market will improve in 2Q. It has.


Home prices are still down 15% year-over-year in June (better than the expected consensus decline of 16.4) and down 30% from the peak in the second quarter of 2006.  The housing market is bottoming, but there is clearly a long way to go to get back to the peak.


Last week, the NAR reported that existing home sales jumped 7.2% to an annual rate of 5.24 million homes, the highest since August 2007.  With the S&P/Case-Shiller housing numbers now showing sequential improvement for the last two months, we would expect the existing home sales numbers to continue to get better in the short run.  If house prices have stopped going down and the free money policies persist, it makes sense to think that consumers will have an increased propensity to buy new homes, helping to gradually push market prices for homes higher (with “dark pools” of inventory overhang waiting in the wings to keep a ceiling on any substantial rally) . 


As we head into 4Q09, however, we are likely to see the best data points in housing in the rear view mirror as a result of the following three points (reiterated from last week):


(1)    THE PEAK SEASON - For those consumers with “need based” moves, it’s August and the kids will be back 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



Lower High: US Consumer Confidence

While it’s interesting to have confirmation that one of the most relevant Pain Trades that remains in the hedge fund community is “short the US Consumer”, it’s always interesting to consider the context of that interesting point.


In the 2 part chart below, Andrew Barber shines a light on where this morning’s better than expected US Consumer Confidence number fits. The top part of the chart focuses on the our intermediate term TREND line, whereas the bottom part of the chart broadens our perspective to the long term (back to 1979).


Understanding that, in the intermediate term (3 months or more), that some of the Q1 2009 confidence readings are some of the lowest on record is very important. That explains, partly at least, why the US Consumer Discretionary ETF (XLY) is the best performing sector in the SP500 today of the nine we have in our Sector Views. From a contrarian perspective, the Pain Trade on US Consumer shorts remains up as a result. It’s the highest short interest group in our SP500 Sector Studies. Being long of short interest continues to pay off.


In the long term however, this morning’s US Consumer confidence reading of 54.10 is a LOWER-HIGH (albeit barely) than those dead cat bounces we saw in both September of 2008 (61.4) and May of 2009 (54.8).


Interesting is as interesting does and, remember, tops are processes, not points.



Keith R. McCullough
Chief Executive Officer


Lower High: US Consumer Confidence - Consumer Condidence 12



BKC’s 4Q09 EPS of $0.43 (including a $0.07 benefit from a lower tax rate) beat the street’s $0.33 estimate.  I would say the biggest positive in the quarter was the 130 bp YOY improvement in U.S. and Canada company restaurant margins.  The biggest negative, though somewhat expected following TAST’s 2Q numbers, was the 4.5% decline in system same-store sales in the U.S. and Canada. 


Judging by the stock’s significant move higher today, investors seem comforted by the U.S. margin improvement and the fact that traffic trends in the U.S. have improved each month since May (but are still negative).  Traffic has been helped by the company’s shift in focus to include more value offerings, such as the $1 Whopper.  Even with traffic getting sequentially better in July (as stated by management), I would expect the overall comp number to continue to be weaker than MCD’s U.S. 2.6% same-store sales growth and Wendy’s estimated 2.0% growth.




Q4 Earnings Call Commentary

Current macro backdrop continues to adversely impact results:

-higher unemployment (July's unemployment rate in the U.S. 18 to 39-year-olds is now 12% and even more disconcerting is the 20% unemployment rate among ethnic groups in this age group which represents a disproportionate amount of the heavy user and super fan base)

-more consumers eating at home (out of home eating expenditures which are now at a 28 year low in the U.S. according to the NPD group)


Current comp trends (most of Q&A focused on U.S. traffic trends):

- U.S. comps and sales have improved since May although not to levels with which management is satisfied.  New value promotions will continue to put pressure on average check and it is expected to be flat to down.  Importantly, management stated that the dilution to gross profit margin, from these lower price points, has been lower than initially forecasted.

-Germany and Mexico comps and traffic have improved albeit still at negative levels.

 “I think the Mexican consumer is somewhat more confident…We have seen month over month continued improvement in our sales, and I don't think there is anything we need to do differently there.”

“In Germany I would say, again, a challenging economic environment there. We continue to move more towards affordability, and I would say there is more we can do on that front. I wouldn't say we're as far along as we are in Mexico. We certainly moved in that direction, but I think we can go further, and again I believe we have seen improvement over the last two or three months.”


Comments about Q1 Comp:

“I think we're not going to give you a number obviously on what we think from a comp standpoint for the quarter. You can tell from our comments we're saying the U.S. has gotten better month by month. We talked in our comments about the fact that Mexico and Germany had improved all be it we're still negative, so I think that gives you a sense of roughly how the quarter is looking, but that's all the color we really want to give at this point.”


Fiscal 2010 Outlook:

Management anticipates the current challenging environment will continue into fiscal 2010.  Due to the lack of visibility, the company is not providing specific EPS guidance for the year.


-most difficult to forecast is comps but expected to be soft in 1H10 and improve in the second half if consumer sentiment improves

-250 to 300 net new restaurants (represents a growth rate below long-term guidance due to commercial construction delays) with 80%-90% of net new units outside the U.S.

-U.S. commodities expected to be flat to slightly better (improve in the first half of the year and be up slightly YOY in 2H)

-Commodity costs outside the U.S. will be up a few percentage points YOY

-Capex of approximately $175-$200 million



After experiencing a rapid decline in traffic starting in March, BKC shifted its promotions to focus on satisfying the need for affordability with the $1 whopper junior in the U.S. and affordable combo promotions in Germany and Mexico and throughout many of the company's other international markets.

-also offering local market value promotions in the U.S., such as 2 for $3.50 Whopper® sandwiches and 2 for $3 chicken sandwiches, across many cities. Since implementing these value offerings, the company stated that it has seen a progressive improvement in traffic.


4Q09 commentary:

-U.S. and Canada Company Restaurant Margins: up 130 bps, benefited from 120 basis points improvement in food, paper and product costs, a 100 basis points improvement in occupancy and other operating costs primarily due to the lower accelerated depreciation expense related to the reimaging program incurred this year compared to last year and to a significant decrease in utility expenses partially offset by increases in labor costs.

-EPS increased 16% to $0.43 as compared to $0.37 in the same quarter last year. Currency translation negatively impacted earnings per share by $0.03 within the expected range for the quarter. This quarter's EPS was positively impacted by $0.07 due to a lower than forecasted tax rate of 21.6%, the result of the dissolution of in-active foreign entities. Without this tax benefit EPS would have been $0.36 for the quarter and within the company's previous guidance given in April.




As we Follow tactical opportunities in the Chinese equity market, we have been tracking both the A shares listed domestically and H shares in Hong Kong separately in order to take maximum advantage of the divergent volatility in the two markets and share classes.


Currently the thirty day realized volatility for the Shanghai Composite is about 40 while the ten day realized volatility is about 54 versus 31 and 32 respectively for the Hang Seng.  Our preferred vehicle for A share exposure, CAF, has a thirty day realized volatility level exceeding FXI by 5 points despite the fact that CAF contains exposure to a larger group of individual equities, and exceeding the 30DV of EWH by almost 10 points.






From our perspective, this difference in volatility has created a more tolerable trading range for Hang Seng listings in the intermediate term that allows us a greater degree of tactical confidence selecting entry and exit points for now. We reserve the option to harness the greater volatility represented by the Shanghai A shares to our advantage however, in order to capture larger swings when compelling entry points present themselves.


One part of our thesis on this divergence of volatility is that, structurally, the closed Shanghai markets have become capable of greater volatility in recent month as an increasingly significant percentage of volume there has been driven by inexperienced investors including a large retail component (who are using margin for the first time since the practice was introduced late last year) and that the proprietary investing groups at domestic banks. These leveraged traders have been the catalyst for recent spikes in short term lending rates as the market has digested a heavy IPO calendar. Certainly there has been a significant “hot money” factor driving the Shanghai market in recent months.


The decision to choose exposure via an A share vehicle, H share vehicle or even through ADRs becomes increasing less important as the underlying investment duration is extended. In other words,  picking the right ETF or closed-end fund is critical for short term traders, but much less significant for longer term investors (provided that the divergence between the valuation metrics for each class are inside a band which is historically reasonable –valuation and not volatility becomes the compelling selection factor on a long tail basis). As we manage our portfolio tactically, in real time, we will continue to select our vehicles to maximize our performance to risk balance.


Andrew Barber



Market shares shifted a bit sequentially but nothing material.


Total shipments into North America increased sequentially to 20k from 16k in 1Q09

  • We estimate new and expansion units decreased to 8,700 from 11,000 in 1Q09 and 22,500 in 2Q08
  • Replacements and Canadian shipments had a sequential uptick to 10,700 from roughly 5,000 in 1Q09 and 7,350 last year

Market shares:

  • IGT: 35%, level with last quarter and down from 41% y-o-y
  • WMS: 23%, down from 25% last quarter but up from 19% last year
  • BYI: 20%, up from 17% last quarter and level with last year
  • ALL: 1H09 results were at 12% up from 10% last year

Other “trends”

  • WMS looks capable of maintaining its share between 20% and 25% in NA especially considering the positive feedback we've been getting from the operators
  • BYI share appears to have flattened at approximately 20%
  • IGT have stabilized at around 35%
  • ALL seems to be gaining traction with its new Viridian cabinet

The chart below summarizes our slot ship share estimates for Q209:


                                                                           2Q09 SLOT SHIP SHARE  - slot suppliers na marketshare rg



This morning BYI announced that it won a new systems contract with Coushatta Casino Resort in Kindler, LA.  BYI's ACSC Version 11 system will be replacing Arisotcrat's Oasis system.  In addition to providing slot monitoring, marketing and accounting, BYI will also provide Coushatta with add on products like iView, Bally Power Bonusing, Bally Rewards, and Power Winners.


The installation is scheduled to take place by year end 2009, or BYI 2Q2010.  We estimate that BYI will recognize $10-11MM at installation and recurring revenue of $2MM per year from this contract.  In terms of earnings, BYI should generate one-time EPS of $0.08 and annual recurring EPS of $0.02.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.