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Casual Dining Margins - Another Leg Down

The combination of a consumption recession and rising commodity costs is producing one of the toughest business environments in decades for the restaurant industry. Unfortunately, there appears to be another leg down before things get better. Consumers will continue to keep a tight grip on their wallets, as restaurant companies use price to keep margins from collapsing. With inflationary pressures so severe, margin declines are inevitable. Another factor that complicates the process is the increased discounting many companies are using to drive incremental traffic.
  • The casual dining industry saw its margins stabilize in the first quarter of 2008 after a severe decline in the second half of 2007. While it will be another month before we get a glimpse into the second quarters for most of the companies, the recent data flow on food prices, discounting and the increase in the minimum wage suggest it could be a long summer for many casual dining companies. Several companies are starting to report EBIT margins anywhere from 0-6%.

CSX Update: Our Eyes Aren't the Only Ones on Chris Hohn Now...

On May 22nd, as Chris Hohn's hedge fund was rallying the "event driven" community to join his call to action in court vs. CSX management, we first called this "activism" exhibition out onto the carpet. Timing, as Hohn evidently knows well, is critical in understanding that tops are processes, not points.

Since 5/30, after the stock was conveniently marked at its 52 week high on month end for May 2008, CSX has fallen -7.1% from $69.06. Deutsche Asset Management and 3G Capital were the 2 other recipients in the top 3 holders of this wonderfully ironic month end performance result.

In between then and now, we've had the ruling Judge in the CSX case (Judge Kapplan) look a lot like a toreador furiously waving a red flag in the face of an SEC bull:

Some people deliberately go close to the line dividing legal from illegal if they see a sufficient opportunity for profit in doing so. A few cross that line and, if caught, seek to justify their actions on the basis of formalistic arguments even when it is apparent that they have defeated the purpose of the law.

It's likely that the entire nature of the Total Return Swap business will change dramatically with this ruling as regulators and banks realign their perceptions of the product. I recommend reading the ruling - it's a fascinating document that comes complete with charts detailing the transactions in question.

Wall Street's fascination with "activism" will be looked back upon as simply another silly function of the cheap money leverage cycle.
KM

Is It Cheaper To Eat At Home? - Maybe Not Any More!

On June 5th I posted the following: According to the CEO of Tyson (TSN), Richard L. Bond, it is cheaper for Americans to cook most food at home, but the cost of food at the supermarket is rising faster than menu prices at restaurants; 4% at restaurants and nearly 8% in the retail grocery channel. TSN has raised prices on some products, but not at the same rate of inputs costs, especially chicken prices. According to Mr. Bond, the lag of higher priced corn is just now hitting the products that TSN is introducing to the market place.

Based on what we are seeing in the chart below, Mr. Bond might need to update his comments!

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India's Inflation Headache...

A very well known strategist who has not admitted himself to the inflation camp until most recently, likes to argue that US wage growth is weak, therefore inflation will "eventually slow."

The problem with that argument is that it ignores the wage spiral that we are seeing everywhere other than in the USA.

It is indeed "global this time" and this chart states the inflation case quite explicitly.
KM

Dr. Copper's Chinese Friends...

Chinese industrial production numbers for May came in at a respectable +16%, but that is still down -210 basis points from last year's growth rate. Dampening Asian Industrial Production growth rates have explained most of copper's weakness in Q2.

However, as the facts change we do, and copper prices have done just that in the last week. We continue to hear that demand for building materials in Sichuan is starting to kick in, and that the process of rebuilding is only just beginning. This renewed Chinese demand story has provided a bullish narrative for copper prices.
  • Supply: More compelling supply data points come from the mining sector where there are some growing concerns that many of the major new copper projects that are supposed to come online internationally may not become operational on time.
  • Why? Credit constraints, rising transportation costs and, particularly in the case of Latin America, a deteriorating political situation.

Charting Brazil: Breaking Down?

Since I wrote my "Fading Fast Money" morning call on 5/21, Brazil's stock market is down -12.1%. Call us lucky or call us right, we're cool with both.

The chart of the Brazilian Bovespa Stock Index is as interesting as any Global Macro one that I am currently looking at. Within my macro model, its critical to differentiate between a "Trade" (short term) and "Trend" (intermediate term). From this perspective, Brazil is actually broken on a short term "Trade" basis, for the 1st time in Q2. Brazil's central bank continues to raise rates aggressively, and economic historians will recall that Brazil has indeed had economic cycles in the past!

The Bovespa got crunched on Friday, closing down -3% at 64,613, underperforming the US stock market, which has rarely happened in 2008. This was an important macro callout and negative divergence.

"Trend" line support for the Bovespa is 61,300. Clearly, for the "own everything agriculture community" this levee line needs to hold. On the upside, a recovery rally closing above 66,082 would definitely be incrementally bullish.

As always, I remain data dependent.
KM
(chart courtesy of stockcharts.com)

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