Early November GGR forecast of HK$20-22 billion
Average daily table revenues for the first 6 days of November slowed to HK$639 million from HK$678 million in the last week of October. One week of data doesn’t make a trend and we don’t know the impact of hold. We would caution, again, that November is likely to display a sharp slowdown from October (see “An Eye on November” published on 11/02/11). October contained Golden Week, 31 days, and a high VIP hold percentage. Our projection for full month November Gross Gaming Revenues is HK$20-22 billion, up 19-31% YoY. At the midpoint of that range, HK$21 billion, November would represent a 19% MoM decline.
Market shares are pretty irrelevant at this point but SJM and Galaxy had the strongest week.
There is an old saying that it is hard to kill a restaurant company and Cosi is living proof of that!
I have been analyzing the restaurant industry for twenty years now and I have witnessed only a few other companies that have destroyed more shareholder value than Cosi. Investing in a small capitalization company, particularly a restaurant company, you are really investing in management and management’s ability to grow and create shareholder value.
With the current Board and interim CEO being pressured by the Blum Growth Fund to make significant changes to the management and operating structure it was interesting to dive into the company latest addition to the company’s Board.
On October 24th, Stephen F. Edwards was appointed to the company's Board of Directors. Naturally you would think that the Board would be interested in adding some one to the Board that has a keen insight into operating a restaurant company. That being said, why not wait till you find the new CEO and let him or her appoint people to the Board that will be helpful to the new turnaround effort?
I believe that there could be another motive behind the appointment, like trying to find a buyer for the company.
After doing a little digging it appears that the “good old boy network” is alive and well on the Cosi Board. It appears that two of Cosi’s Board members brought in a friend to help sell the company.
I come to that conclusion by looking at the proxy for Champps. Two current Board members of Cosi (Michael O’Donnel and Karl Okamoto) were involved with Chammps at the time it was taken private and the new Board member Stephen F. Edwards was involved with F&H Acquisition Company, which bought Champps. At the time that Chammps was sold, the CEO was Michael P. O’Donnell and Karl Okamoto was a member of the Board.
I would suggest that while Stephen F. Edwards may have knowledge of the restaurant industry, he does not bring to the board the operational knowledge the company so desperately needs. He may be a great investment banker, but I do not think that selling the company is in the best interests of shareholders given that much shareholder value has been destroyed of late and, given the potential of the brand, it could be regained with interest under the right leadership.
If my reasoning is correct here, and the current leadership is angling the company toward a sale, I would not accept less than $2 per share for my stake.
I do not know Mark Demilio and have never engaged in a conversation with him, if I did here are some of the questions I would ask him about this move and other outstanding issues.
- Why did the company feel the need to appoint a new member to the Board?
- Why did you wait until October 28th to make the announcement when Stephen Edwards was appointed on October 24th?
- What are Mr. Edwards’s qualifications that will help the company move on from the desperate financial condition?
- Any progress on finding a new CEO?
- What qualifications are you hoping to find in the new CEO?
- Have you engaged Mr. Blum on his plan for the company?
- What is your plan for the company?
- Why are the company's sales trends underperforming the category?
- Have you seen the results from the Blum Growth fund survey?
- Do you believe that you have shareholder support as Chairman of the Board?
- Do you think you can survive a proxy fight?
- What are thoughts about the next capital raise for the company?
I get a lot of questions why I spend time on Cosi. The easy answer a year ago was that I saw an opportunity for investors to make money. That is still the case today, but now it might be more appropriate to make sure people don’t lose money on a company that could be headed for bankruptcy.
In the past I have had numerous dialogs with the previous CEO Jim Hyatt and know of several board members of the company. I have a lot of respect for them and their knowledge of the industry and I also have faith in their integrity.
Nevertheless, the current situation at Cosi is deeply disconcerting.
Why is there no sense of urgency in getting the right CEO in place? While it’s not politically correct for the interim CEO and Board to acknowledge publically that Cosi is in desperate financial shape, the reality is clear for all to see and time is running out. The current situation seems to be completely dysfunctional and it appears that management might have other intentions besides pursuing a focused turnaround plan.
According to the Blum Growth Fund survey (available here) management needs to go. As you can see, there are only 2 respondents that do not want to see a new CEO and Board of Directors him and his plan enacted. 70 of those that replied to the survey do want a new CEO and Board of Directors. If the survey is an accurate representation of shareholder sentiment, it would seem that Mr. Demilio would have his work cut out for him in a proxy fight. Unfortunately, it would appear that the company cannot wait until June to see what the results of a proxy fight would be.
By then, the company will have burned through its cash and will be headed for Chapter 11.
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The chart below shows gasoline prices trending lower as we go through 4Q.
SBUX: The price target for Starbucks was raised to $52 from $45 at RW Baird.
CBRL: Cracker Barrel reported preliminary 1QFY12 results this morning, guiding to EPS of between $0.99 and $1.04 for the quarter versus consensus of $0.90. Comparable restaurant sales were -1.6% for the quarter with average check up 2.2% and traffic down -3.8%. Trends improved over the course of the quarter.
GMCR: Green Mountain shares should be sold into strength, according to Stifel Nicolaus, citing doubts about the company’s long-term market penetration rate. The firm maintains a Sell rating.
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Credit default swaps for German and French banks were 20% wider last week, while Spanish and Italian CDS blew out to 399 and 516 respectively. Greek bond yields made a new all-time high, widening 353 bps. Early in the week, the TED spread made a new YTD high before retreating slightly.
Financial Risk Monitor Summary (Across 3 Durations):
- Short-term (WoW): Negative / 1 of 11 improved / 7 out of 11 worsened / 3 of 11 unchanged
- Intermediate-term (MoM): Positive / 6 of 11 improved / 3 of 11 worsened / 2 of 11 unchanged
- Long-term (150 DMA): Negative / 1 of 11 improved / 8 of 11 worsened / 2 of 11 unchanged
1. US Financials CDS Monitor – Swaps widened for 26 of 28 major domestic financial company reference entities last week.
Widened the most vs last week: GS, MS, HIG
Widened the least/ tightened the most vs last week: MTG, MBI, GNW
Widened the most/ tightened the least vs last month: PMI, RDN, AGO
Tightened the most vs last month: LNC, MBI, HIG
2. European Financials CDS Monitor – Bank swaps were wider in Europe last week for 36 of the 40 reference entities. The average widening was 7.6% and the median widening was 14.6%. Swaps for Credit Agricole and the Deutsche Bank widened 31.7% and 31.3% respectively. The nine French and German banks we track saw swaps widen an average of 19%.
3. European Sovereign CDS – European sovereign swaps mostly widened last week. Spanish sovereign swaps widened by 18% (+60 bps to 399) and Italian by 19% (+82bps to 516). US CDS widened off a low base, rising from 40 bps to 48 bps.
4. High Yield (YTM) Monitor – High Yield rates fell 13 bps last week, ending the week at 7.70 versus 7.83 the prior week.
5. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4 points last week, ending at 1591.
6. TED Spread Monitor – Early last week, the TED spread hit another new YTD high of 44.5. It retreated slightly off of this level, ending the week at 44.3 bps.
7. Journal of Commerce Commodity Price Index – The JOC index fell 2.3 points, ending the week at -20.8 versus -18.5 the prior week.
8. Greek Yield Monitor – The 10-year yield on Greek debt rose 353 bps last week, ending the week at 2677 bps, a new all-time high.
9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1. Last week spreads widened, ending the week at 163 bps versus 151 bps the prior week.
10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production. Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion. Last week the index fell 234 points, ending the week at 1784 versus 2018 the prior week.
11. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 10-year yield fell to 2.04, pushing the 2-10 spread to 181 bps, 22 bps tighter than a week ago.
12. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.8% downside to TRADE support.
Margin Debt Falls in September
We publish NYSE Margin Debt every month when it’s released.
NYSE Margin debt hit its post-2007 peak in April of this year at $320.7 billion. The chart below shows the S&P 500 overlaid against NYSE margin debt going back to 1997. In this chart both the S&P 500 and margin debt have been inflation adjusted (back to 1990 dollar levels), and we’re showing margin debt levels in standard deviations relative to the mean covering the period 1. While this may sound complicated, the message is really quite simple. First, when margin debt gets to 1.5 standard deviations or greater, as it did this past April, that has historically been a signal of extreme risk in the equity market - the last two times it did this the equity market lost half its value in the ensuing period. We flagged this for the first time back in May of this year. The second point is that margin debt trends tend to exhibit high degrees of autocorrelation. In other words, the last few months’ change in margin debt is the best predictor of the change we’ll see in the next few months. This is important because it means that margin debt, which has retraced back to +0.43 standard deviations as of September, still has a long way to go. We would need to see it approach -0.5 to -1.0 standard deviations before the trend reversed. There’s plenty of room for short/intermediate term reversals within this broader secular move, but overall this setup represents a material headwind for the market.
One limitation of this series is that it is reported on a lag. The chart shows data through September.
Joshua Steiner, CFA
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This note was originally published at 8am on November 02, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Equality of outcome is a form of inequality.”
As I sit here in my hotel room in San Francisco this morning, the elephantine intellects of the Fiat Fool system continue to attempt to centrally plan us towards “equality.” Meanwhile, markets are producing very Unequal Outcomes.
Instead of stability, we have volatility. If the +41.9% rip in the Volatility Index (VIX) in the last 3 days isn’t a reminder of that, I don’t know what is…
My longest of long-term theses about Big Government Intervention and money printing remains. From Japan, to the USA, to Europe, and back again, Fiat Fool policies to inflate A) shorten economic cycles and B) amplify market volatility.
Back to the Global Macro Grind…
Get the US Dollar right, and you’ll get mostly everything else right. As bad as I looked being long the US Dollar last week is as good as my team looks this week. The US Dollar has put on an impressive +3% move, recovering its TREND line of support (75.37 on the US Dollar Index), and mostly every asset class price that’s inversely correlated to that has fallen, hard.
Since I shorted the SP500 on Thursday at 1290 (Time Stamp), US stocks have had a straight down correction of -5.6%, taking the SP500’s correction from its 2011 YTD high (April) back to a double digit loss (-10.6%). Longer-term, like Japanese stocks, the SP500 has crashed from its all time peak (down -22.2% from October 2007). Bull market?
With all but 3 country stock market indices in the entire world negative for the YTD, this is obviously not a bull market in equities. It’s a bull market in long-term US Treasuries. It’s a bull market in volatility. But these asset classes are pricing in very Unequal Economic Outcomes.
Update on the Eurocrat Bazooka:
This morning Old Wall Street’s finest brokerages tried to fire the first mini-missile of EFSF bond issuance from Ireland, and had to abort mission! Given that this was the 1st €3B of €600 or so BILLION of these fiat issues coming down the pike, I’d say that’s really not good.
Inclusive of attempts to ban short selling, ban CDS trading, and ban gravity, European markets have already been telling you how this sad story of Keynesian spending and leverage ends…
- Germany’s DAX snapped its TREND line of 6112 yesterday and is crashing again (down -22% from its 2011 peak)
- France’s CAC never recovered its TREND line of 3403, and continues to crash (down -26% from its 2011 peak)
- Greece’s Athex Index never recovered a risk management line of consequence in the last 12 weeks (down -56% from its 2011 peak)
Never mind the €2-3 TRILLION Bazooka, these professional politicians can’t sell the world on €3B in bonds!
The European Sovereign Bond market gets this obviously. In fact, they didn’t suspend disbelief like stock market people did last week either. Italian and French sovereign debt yields continue to make a series of higher-highs, reminding you that piling-debt-upon-debt-upon-debt structurally impairs economic growth.
Setting aside the differences between Europe, Japan, and the US, that’s the story of the Fiat Fools that isn’t getting its “fair share” of air-time, yet (Obama’s team is working on rectifying this inequality). The part about causality. The part that would require these central planners to accept responsibility for the bigger problem than maybe even the banks themselves – Growth Slowing.
If Growth Slowing takes Europe’s economy into the negative 1-3% GDP zone as inflation spikes into the +3-6% range, what do you get?
Stagflation earns the lowest multiple for stocks (read: in the 1970s, the SP500 traded at 7x earnings 3 different times in the same decade). Why is that so? Simple: the combo of Growth Slowing and Margins Compressing is the kiss of the “value” investor’s death.
That’s the bad news. And it’s a European problem that perversely could result in a Strong US Dollar which, in turn, would Deflate The Inflation in America (think commodity prices). In the long-term, while these are very Unequal Global Macro Outcomes relative to how the central planners of the 2011 Fiat were thinking, this should only perpetuate global economic volatility in the short-term.
As for the “price stability”, stay tuned for the Bernank’s latest on that at his 1230PM EST press conference.
My immediate-term support and resistance ranges for Gold (bullish TRADE and TREND), Oil (bullish TRADE; bearish TAIL), German DAX (bearish TRADE, TREND, and TAIL) and the SP500 (bullish TREND; bearish TAIL) are now $1710-1785, $91.16-93.87, 5828-6119, and 1213-1248, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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