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Burning The Buck: Update...

It put a smile on my face to hear of my least favorite manic media network talking about a “burning buck” today. I wonder where they read about that investment theme…

 

This is a funny business. If you can’t wake-up to something to laugh at, you probably aren’t awake. The 2009 Global Macro inverse correlation that continues to dominate is that which is anchored on a US Government sponsored Burning Buck. It can make you smile and cry all at once.

 

Today, despite a Burning Buck becoming consensus, the US Dollar continues to get sold. The chart below outlines the severity of this US Currency Crisis. At down -0.36% today, the US Dollar Index is threatening to crash through the $77.00 line. Crash? Yes. When the world’s said “reserve currency” drops -13.5% in 6 months, by Research Edge’s definition - that’s a crash.

 

There are actually two charts below – the intermediate term one showing that the US Dollar Index is broken across all 3 of our investment durations (TRADE, TREND and TAIL), and the long term chart showing the US Dollar Index price dating back to the date that matters, 1971, when Nixon abandoned the Gold standard.

 

The long term chart provides the critical context of our Burning Buck call. On only one occasion in the last 38 years has the US Dollar Index sustainably weakened below the $78 level other than right here and now – that occasion, of course, was one of the leading indicators to our calling the 2008 US stock market crash.

 

At what point does Burning The Buck hurt US stocks rather than help them? In 2009, after watching the US Dollar crash on the downside and the US hedge fund community seeing their shorts crash to the upside, anything can happen here. At 1041 in the SP500, I have the generational short squeeze in US stocks running out of momentum.

 

Remember, like calling bottoms, calling tops are processes, not points.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Burning The Buck: Update...  - a1

 


RESTAURANT INDUSTRY – DEMAND ISSUES

Given the news from MCD today, the following thoughts on unemployment help to explain why MCD is seeing sluggish trends in the USA!

 

This chart tells the story about a key demographic for the QSR segment - the core 16-24 year olds - which are heavy users of fast food. 

 

The following is taken from Andrew Barber’s post “Stagflation: Where the Pain is...”:

 

IDLE YOUTH

Looking at total employment ratio’s estimated by the Department of Labor shows that, on a seasonally adjusted basis 16-24 year olds had a very rough summer in 2009 with the figure hitting the lowest level since inception in 1948 and fewer than 50% working for the first sustained period since the draft ended (without seasonal adjustment that ration would be over 51%).

 

DOL methodology excludes military personnel from the labor force estimates but, with up a huge percentage of all men 18-21 drafted (or motivated to enlist by the draft) at periods between the end of WW2 & early 70’s, and furthermore with 72% of all Vietnam period veterans accessing GI bill benefits (significantly higher than WW2 & Korea vets, presumably because Vietnam vets were significantly younger as a group) it must have skewed this data immensely. Note that the prior Assistance Readjustment act of 1972 raised GI bill benefits for returning servicemen to payout levels exceeding many entry level salaries –essentially creating a huge incentive for veterans not to work during the subsequent recessionary periods. This all suggests that, on the whole, the employment picture for young Americans is significantly worse than at any point in the living memory of the majority of the population.

 

RESTAURANT INDUSTRY – DEMAND ISSUES - 16 24

 

 


PSS: SELL MORTIMER, SELL!

CEO Matt Rubel sold 100,000 shares just days after commenting on the 2Q earnings call that Q2 marked the bottom. Yes, that came as an initial shocker to us on many levels. But the picture becomes far less suspect after a deeper dive.

 

First off, when Matt Rubel joined PSS in July 2005, his employment contract included an option on 720,000 shares of common stock at $20.93/sh and 214,250 shares of restricted stock. Under the vesting schedule, 120,000 shares were to vest on the 1st and 4th anniversary of the grant, with 240,000 shares on the 2nd and 3rd anniversary.  We just passed the four year lockup. 

 

Secondly, and perhaps most importantly, check out the chart below. We’re not looking at the most stellar track record of market timing here. Rubel’s last three sales left money on the table as the stock kept grinding higher. In fact, he had a $630k sale immediately before a 100% run in the stock in July 2008.  His best trade was calling the top and selling 25% of his stock in the late summer of 2007 – just as the credit environment melted down, the economy went sour, and the SRR deal turned out to be horribly timed.

 

THE question here is whether he is again ‘calling the top.’  That answer is No. Say what you want, but the guy has a Macro process. We sat down with him for a couple hrs last month, and walked through the macro call, and how he is aligning the company’s resources to leverage the upside. I’m genuinely not concerned about this sale. Check out our PSS Black Book for more details on our thesis.

 

 

PSS: SELL MORTIMER, SELL! - PSS RubelTrans 9 09


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SBUX – Interesting Takeaways

Starbucks CFO Troy Alstead presented this morning at an investor conference and based on his comments, the company appears to be maintaining its momentum.

 

First, in reference to my comments earlier this morning on MCD’s August sales trends, Mr. Alstead stated that there is a great deal of noise in the coffee segment that has helped everyone in coffee, including Starbucks.  This helps to explain why SBUX’s sales trends are becoming less bad at the same time MCD launched its national campaign behind its McCafe beverages.

 

Signs that SBUX’s focus on cost cutting and improving profitability is working:

 

SBUX removed 30 stores from its planned closure list.  These 30 stores were significantly underperforming and slated to close, but are now contributing profitably. 

 

Mr. Alstead said that the initial results out of the 2009 class of stores are encouraging.

 

He stated that management still has limited visibility (though he believes the company has more visibility than it had 6 months ago), but that SBUX shaped its plans and forecasts around the expectation that there is still a long economic recovery ahead of us.  That being said, he thinks the company is positioned to live in this environment and still grow margins.

 

SBUX is still a growth story:

 

Mr. Alstead commented that going forward, SBUX’s growth will be more focused on improving the profitability of its currents store base rather than unit growth.  Along those same lines, he said that capital spending will first be allocated to preserving the health of its current portfolio before going to new unit development.  To that end, he said that the company’s business model can now yield very healthy profit growth with only slight comp growth (more mature comp growth). 

 

There is still unit growth ahead, however.  Unit growth will continue to be cautious in 2010, but the CFO said that there is room for growth in the U.S. and significant opportunity outside of the U.S.  Specifically, he said that he does not see the company growing as fast as it did 2-3 years ago, but expects it to accelerate from 2009 and 2010 levels.  The company will pursue this growth in a more disciplined manner, with a close watch on the velocity in which it penetrates markets and a focus on achieving a 2 to 1 sales to investment ratio.

 

Mr. Alstead also said that there is huge headroom for non-store channel growth as the Consumer Product Group’s business is still under exploited in the U.S. and open to pursue internationally. 

 

Driving shareholder returns:

 

When asked how the company will use its free cash flow, Mr. Alstead responded that management is focused on driving shareholder returns and will be making strategic decisions about “how to distribute cash.”  I have been saying for some time now that I would like to see SBUX establish a dividend in order to increase its total amount of cash returned to shareholders to a level more in line with that of its global restaurant peers (MCD and YUM).  This could be one way the company will decide to distribute cash.

 

 

Other key takeaways:

 

The CFO stated that the company’s decision to raise prices on some products while lowering prices on others to reflect costs and the consumers’ willingness to buy will be net neutral to net positive to margins.

 

SBUX continues to be focused on its advertising with the CFO mimicking a comment that CEO Howard Schultz has made in the past that the company will no longer allow itself to be defined by others.

 

SBUX – Interesting Takeaways  - sbux

 


Stagflation: Where The Pain Is...

“I want to be clear on something: less bad is not good”, “That’s not how President Obama and I measure success”  Vice President Biden, WSJ Saturday September 6th on last week’s unemployment number… 

 

The single biggest market story of last week was unemployment re-accelerating to new highs and the subsequent crashing of the US currency. In our investment process, what happens on the margin is critical, and on the margins of the US Employment data –the demographic and duration tails, the picture is becoming increasingly grim:

 

DESTITUTION’S DURATION

In the charts below we have taken the monthly unemployment figures compiled by the Department of Labor for the estimated total of individuals without work for a period of 27 weeks or greater and averaged it to quarterly for the past 60 years. Chart 1 illustrates the raw number, while chart 2 shows the same figures divided by the Labor Department’s estimate of the total working population. Note that in chart 2 we are now exceeding the early 80’s industrial-job death rattle for ultra long duration unemployment.

 

Stagflation: Where The Pain Is...  - a1

 

Stagflation: Where The Pain Is...  - a2

 

IDLE YOUTH

 

Looking at total employment ratio’s estimated by the Department of Labor shows that, on a seasonally adjusted basis 16-24 year olds had a very rough summer in 2009 with the figure hitting the lowest level since inception in 1948 and fewer than 50% working for the first sustained period since the draft ended (without seasonal adjustment that ration would be over 51%).

 

DOL methodology excludes military personnel from the labor force estimates but, with up a huge percentage of all men 18-21 drafted (or motivated to enlist by the draft) at periods between the end of WW2 & early 70’s, and furthermore with 72% of all Vietnam period veterans accessing GI bill benefits (significantly higher than WW2 & Korea vets, presumably because Vietnam vets were significantly younger as a group) it must have skewed this data immensely. Note that the prior Assistance Readjustment act of 1972 raised GI bill benefits for returning servicemen to payout levels exceeding many entry level salaries –essentially creating a huge incentive for veterans not to work during the subsequent recessionary periods. This all suggests that, on the whole, the employment picture for young Americans is significantly worse than at any point in the living memory of the majority of the population.

 

Stagflation: Where The Pain Is...  - a3

 

Obviously the data we are working with are only estimates, and we are making some big assumptions, but the data clearly seems to paint a bleak picture with more people unemployed for sustained periods and fewer young people with the disposable income that comes with a job. With a depleted currency, structural stagflation is becoming a legitimate risk.

 

Andrew Barber

Directordrew Barber
Director


MCD – Premium products are not driving incremental traffic

Given the sluggish sales trends in the USA, senior management must be questioning the most expensive new product launch in the company’s history.

 

Relative to my August sales preview, both the U.S. and APMEA numbers were bad and Europe results were neutral.  In the U.S., MCD’s same-store sales growth was up 1.7%, which signals a return to the slowed 2-year trends we saw in May and June, making the strength in July look like an aberration.  Again, I would point to bad timing.  MCD is pushing more premium menu items (the Angus Third Pounders and McCafe espresso-based coffees) at exactly the wrong time, considering the difficult economic backdrop.  The all important 16-24 year old age group is facing extremely high levels of unemployment so for the most part, they don’t have the discretionary income to pay up for these more expensive menu items. 

 

Additionally, this continued slowdown in the U.S. highlights that MCD’s espresso-based beverage platform is still not working.  MCD’s business is coming under pressure at the same time SBUX’s is posting sequentially improved results.  SBUX’s numbers are still negative relative to MCD’s low single-digit increases but the directional moves are telling.  SBUX’s results are becoming less negative at the same time MCD is really pushing its McCafe products. 

 

APMEA’s August comparable sales growth came in down 0.5%.  This decline marks the first time this segment has posted a YOY monthly decline since May 2005 and represents a significant shortfall from the 5%-plus numbers to which investors have become accustomed.  MCD attributed the decline to weakness in China and Japan.  On a 2-year average basis, August results were similar to June and July, which signals that MCD may be facing a period of sustained weakness in its APMEA segment. 

 

In Europe, MCD reported 3.5% same-store sales growth.  I outlined this type of result in my sales preview note as Neutral because it represents a 2-year average trend that is similar to that of July.  For August, the two-year average growth is 7.6%.  To be clear, this is a strong result, but people expect this type of growth out of Europe. 

 

MCD – Premium products are not driving incremental traffic - mcdussss

 

MCD – Premium products are not driving incremental traffic - mcdeursss

 

MCD – Premium products are not driving incremental traffic - mcdapmeasss


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