If you’ve been following our work you’d know that we’ve had a bearish bias on the UK for the balance of the year. The Producer Price Index numbers for September released today by the Office for National Statistics support our thesis that inflation will outpace growth in the UK, adding to the cocktail of negative headwinds for the island nation.
Annual output price (factory gate) for all manufactured products rose 0.4% in September or +0.5% month-over-month, while annual input prices fell 6.5% compared with a decline of 7.7% in August on a year-over-year basis. In short, producers are still benefiting from lower energy (input) costs on annual compares, but sequentially energy, transport, and food costs are inflating --gaining 2.0%, 0.6%, and 0.3% respectively for the month.
Core PPI, or Manufactured Products other than food, beverages, petroleum and tobacco, rose 1.4% year-over-year driven by a 4.4% rise in motor vehicles and other transport equipment and 3.8% rise in machinery and equipment.
With CPI at 1.6% in August Y/Y --and even with initial forecasts for a decline in inflation to 1.3% when September’s reading is released on October 13th, we’re of the camp that inflation is returning to the UK, an unhappy development for producers and consumers coming out of a recessed economy. Remember that Q2 GDP read positive for Germany and France at +0.3% Q/Q, but much of Europe saw contraction, including in the UK at -0.6% Q/Q. From an inflationary standpoint, we continue to like Germany (EWG) at -0.2% to -0.3% (also the Eurozone average), a level we believe will not profoundly impact consumer demand as long as it remains offset by growth.
Returning to the UK, with both the BOE and ECB sitting on their hands during their latest policy sessions this week and keeping interest rates unchanged at 0.5% and 1.0% respectively, we view the BOE in a tenuous and unfavorable position for the intermediate term. On one hand, the Pound has significantly depreciated against the USD and EUR, down 4.7% versus the USD and 7.9% versus the Euro since Aug. 1; clearly the Pound’s fall has eroded purchasing power for a country heavily dependent on imports. On the other hand, while raising interest rates may clearly be needed to dampen inflation, it could also stymie growth.
As we see the tidal shift of Central Banks moving towards raising rates in a post deflationary environment, we’ll have a close eye on BOE and ECB monetary rhetoric and action. Due to the structural nature of the UK economy, we continue to expect underperformance from the FTSE versus its European peers and the S&P500.
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A bizarre move on the part of BKC…..
On September 17, Burger King confirmed that Russ Klein, Burger King Corp.’s president of global marketing had taken a personal leave of absence. The company quickly replaced him with Mike Kappit, senior vice president of business intelligence.
John Chidsey, Burger King’s chief executive, notified franchisees of the news in an e-mail, in which he wished Klein “a speedy return.”
Apparently, he does but why?
On 4/20/09, I noted that from an advertising standpoint, Burger King had recently made two critical missteps with its edgy advertising tactics.
A month later Business Week ran a story on BKC titled "Burger King's Big Misstep" that stated that CEO John Chidsey wrested control of marketing from his franchisees; now he's losing business to McDonald's. Russ Klien was at the helm when the problems started.
In the BKC proxy filed two days ago, the company disclosed that in late August, they granted a “special equity award” to the Global Marketing Officer valued at $2.25 million as a “retention tool”.
It seems a little bizarre that the guy who was in charge of global marketing for Burger King at the time there were “marketing missteps” was offered a big “retention bonus” and takes a sudden leave of absence.
Who says that September is a seasonally slow month? 57% y-o-y revenue growth suggests otherwise.
The hot streak we saw in August continued throughout the month of September. September revenues were up 57% with VIP revenues leading the charge with 71% y-o-y growth, Mass grew 27% and slot revenue increased 24%. A pick up in the growth rate is no surprise since September 2008 was the first easy comp where y-o-y growth turned negative. The easy comps will continue through June 2010.
September is typically a seasonally slow month for many reasons including back-to-school season and junkets and players saving dry powder for Golden Week. However, it seems that this September didn't experience that seasonal slowdown due to a number of factors including easy comps, looser visa restrictions, stock market rally, new supply additions, and stimulas pumped into the chinese economy. While still early in the month, indications in the press suggest that the strength we saw over the last two months is continuing in October.
The rising tide lifted all ships in September, however MELCO and SJM seemed to be the greatest beneficiaries of this hot month. See below for details on y-o-y performance and market share changes.
Y-o-Y Property Observations:
LVS table revenues up 8%
- Sands was up 10%; with 13% growth in VIP win and 5% growth in Mass
- VIP RC decreased at Sands (~28%), however hold comparisons were very favorable
- Venetian was up 6%; all the growth came from Mass which was up 15%
- VIP RC (Rolling Chip) was up 12% but hold was down
- Four Seasons was down sequentially from August but still more than doubled revenues from last year to $28MM
Wynn table revenues were up 16%
- Mass was down 9%, offset by a 23% increase in VIP
Crown table revenue grew a whopping 244%, with both properties exhibiting strong results
- Altira was up 39%, however September 2008 was a very easy comp given the sub 2% hold
- Hold was below normal at Altira, around 2.6%
- CoD continued to ramp with total revenues growing 32% sequentially to an estimated total of over $145MM
- Unfortunetly Mass ramp continued to be slow, we estimate $18MM
- VIP RC grew 5% sequentially, despite September being a seasonally weak month
- September was another good hold month for the property
SJM continued its winning streak, with table revenues up 87%
- Mass was up 40% and VIP was up 125%
- L'Arc opened September 21rst with roughly 100 Mass and 50 VIP table
- SJM revenues should continue to stay strong with the addition of Oceanus in either Dec or early Jan
Galaxy table revenue was up 57%, mostly driven by a 70% increase in VIP win
- Starworld continued to perform well with table revenue up 74%, soley driven by 92% increase in VIP revenues
MGM table revenue was up 42%
- Mass revenues grew 30%, while VIP grew 47%
- Sequentially results were 34% lower than July & August, partly due to sequentially lower hold (which was still materially better than what MGM held in Sept 2008)
LVS' share decreased to 20% from 24% in August
- Sands' share increased to 8% from 7% in July
- Venetian & FS' share decreased to 11.3% to its lowest share month since March 08 from 17.1% in August
- However, all the share loss was in lower margin VIP which plunged from 16.5% to 8.9% sequentially
- Mass share was flat m-o-m at 18.5%
WYNN's share increased to 13.8% from the low's of 12.6% in August
Crown's market share was 17.5%, up from 16.2% in August
SJM's share increased for the second month in a row to 31.5% from 26.4% in August
Galaxy's share eeked back to where it was in July to 10.6% from 10.1% in August
MGM's share decreased to 7% from 10.5% in the prior month
The US Dollar opened at its highs, and has proceeded to back off those highs. As a result, after opening weak, US Equities have since strengthened.
For short sellers of the REFLATION trade, this has been frustrating, but respect and understand that there are still a lot of funds chasing performance into mutual fund year end AND that mathematical correlations aren’t 100%, particularly on shorter durations.
High R-Squares of inverse correlations (like SPX vs USD) are never perpetual. The #1 risk to my current market view is that, as the Burning Buck becomes consensus, that this dominating 2009 inverse correlation starts to unwind. In the long run, I think raising rates is bullish for America’s balance sheet. And don’t forget that after the Australians raised rates earlier this week, their stock market went straight UP!
For now, the risk management setup is as follows:
1. Immediate term TRADE resistance (dotted red line) = 1080
2. Immediate term TRADE support (dotted green line) = 1047
A close above 1071 (the YTD high) would be very bullish for price momentum. A close below 1047 puts this market’s bullish TREND line of support in play. That line, however, is a lot lower, down at 990 (see chart below).
Keith R. McCullough
Chief Executive Officer
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