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BWLD - BLACK BOOK

At Research Edge, black books provide an in-depth look at our strongest fundamental ideas.  I have recently completed a black book on BWLD.  This black book looks at the company from both a fundamental and macro (Keith McCullough) perspective.  Please email me if you would like a copy.

 

BWLD - BLACK BOOK - BWLD black book


MCD - GOT SOME 'SPLAININ' TO DO!

 

KM just shorted MCD again as the stock broke through his $56.37 TREND line.

 

On the positive side, the stock dividend yields 3.5% and management will likely raise the dividend again in December.  The company reassesses its dividend policy once a year.  The company will generate over $1.0 billion in FCF (after dividends and capital spending), spending most of it on share repurchase.  Valuation is reasonable, trading at 8.5X NTM EV/EBITDA.  Lastly, the dollar headwind will become a tailwind in 4Q09.  What’s not to like?

 

I have no problem being short MCD because sales are slowing and it was the only restaurant company on the planet not to see a big benefit from lower food costs in 2009.  The company will report 3Q earnings on October 22 and is holding its bi-annual analyst meeting in mid November.  Given the severity of the decline in same-store sales, management will likely be on the defensive as it relates to the launch of McCafe – the most expensive new product launch in the company’s history.

 

From day one, I have contended that this McCafe launch was never going to work because it falls outside of the company’s core competency and does not appeal to McDonald’s core customer.  While I thought the product would have some success during the initial launch period, given McDonald’s marketing muscle, even that has not played out.  The continued slowdown in the U.S. highlights that MCD’s espresso-based beverage platform is still not working.  Additionally, as I have said before, the fact that MCD has said recently that breakfast sales are declining increases my conviction that MCD’s specialty beverage launch will not prove to be the success that investors have anticipated for some time.  If the company cannot drive incrementally more specialty beverage sales during the initial months of its national campaign (while offering giveaways) and in the summer months, it will become significantly more difficult going forward.

 

We will be interested to hear from management more specific, measurable performance metrics on the launch.  Specifically, how many McCafe units are the restaurants selling per day relative to the targeted 100 units and what level of incremental sales is being generated relative to the planned $125K per restaurant from the entire beverage rollout.  For reference, the company sold about 45-50 McCafe beverages per day in test markets, a level that some franchisees thought was too low to warrant a national rollout.

 

I’m going to go out on a limb and make up an excuse for MCD executives before they do.  Initially, management contended that it needed to get on national TV for the McCafe product to hit full stride.  Now, MCD is on TV and it’s still not working.  Management will need a new excuse because it is not going to admit defeat just yet.  The NEW excuse will be that that the company needs to get the full line of beverages in place before the consumer will be fully aware of all the new beverage products the company is trying to sell. 

 

 

Also, the all important ROIIC metric that I talk about so often is in a free fall!

 

MCD - GOT SOME 'SPLAININ' TO DO! - mcdroiic


European Expansion, On The Margin

We’ve been writing about  improving fundamentals in Western Europe for months now, and today’s PMI numbers for September confirm that this positive trend is still in motion.   The chart below shows the directional moves on a sequential basis. The take-away here is that Eurozone PMI (composite) improved month-over-month and importantly remains above the 50 level that signals expansion. For Germany and France—the two largest economies in the Eurozone—September showed an improvement in manufacturing and services short of an unexpected decline in German services to 52.2 from 54.1 in August, according to Reuters.

 

Rising unemployment remains a headwind for Europe into year-end and 2010 and we expect the positive rate of change for fundamental metrics (like PMI) to slow over the next two quarters. Eurozone unemployment, which gained 10bps to 9.5% in July and could run into the mid 10% range next year may well erode the gains we’ve seen in business and consumer confidence over the last months and dampen consumer spending. 

 

Inflation, an additional potential dark cloud on the horizon, has begun to pick up but is still running negative at -0.2% in August year-over-year in the Eurozone (Eurostat). We are looking for inflation to ramp on an annual compare in Q4 due to the manic fall in energy costs in October-December of 2008.  As a critical piece of the puzzle we’ll be monitoring the sequential change of energy prices and their impact on the region’s (specifically Germany and France) industrial and manufacturing base. There are no signs of slowing there yet however (based on what lagging data is available), with Industrial new orders in the Eurozone at +2.6% for July, trending comfortably upward from June’s reading of +4%.

 

We bought Germany via the etf EWG on 9/21. The country’s most present catalyst is regional elections this Sunday, which we’ll be writing on in greater depth. We’re currently short the UK via EWU and the Pound via FXB.

 

Matthew Hedrick

Analyst 

 

European Expansion, On The Margin - a1

 


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MGM MAY JUMP ON THE IPO BANDWAGON

MGM may be looking to IPO a portion of its Macau operations.

 

 

Following on the fleet heels of WYNN and LVS, MGM may be looking at IPOing a portion of its Macau operations.  We are unsure if Pansy Ho is involved.  It probably makes sense to capitalize on the big multiples awarded Macau cash flow.  Moreover, unlike those in the US, Macau cash flows are not depressed and may actually be benefitting from somewhat of a VIP bubble.

 

A Macau IPO could generate $120-180 million in gross proceeds to MGM using the following assumptions:

  • 50% MGM ownership of MGM Macau
  • IPO 25% of MGM Macau operations
  • Long-term run rate of $150-175 million in EBITDA at MGM Macau
  • 12-13x multiple
  • Approximately $850 million in net debt at MGM Macau at 12/31/09

Pre-Game Fed Watching...

There is a very interesting Pre-Game developing here in both the US Treasury and Currency markets ahead of Ben Bernanke’s Game Time (2:15PM EST).

 

In the chart below, Andrew Barber and I show the immediate term TRADE line breakout we are seeing in 2-year Treasury rates. That breakout line is at 0.99%, and the marked-to-market rate is currently 1.02%, testing 4-week highs…

 

Coincidently, the US Dollar has stopped going down. Anything that isn’t down versus the Burning Buck’s YTD low (yesterday) is, on the margin, US Dollar bullish.

 

Understanding that bottoms are processes (not points) is critical, but so is respecting that Bernanke has the world power to crush short term Treasury Bonds (letting yields rise) by simply changing his rhetoric on the Fed Funds rate. ZERO percent isn’t a perpetual position.

 

Again, he doesn’t have to signal a rate hike absolutely. All he has to is signal one rhetorically, and that bearish intermediate term TREND line for 2-year yields at 1.07% (red line in the chart below) will be in play.

 

Dollar up, rates up = a lot of things REFLATION down.

 

2-year yields are where they are Pre-Game. Oil is getting hammered. Copper has broken its immediate term TRADE line ($2.85/lb) as well.

 

Stay tuned…

 

Keith R. McCullough
Chief Executive Officer

 

Pre-Game Fed Watching...  - a1

 


Yesterday's Today

“In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual.”
-Galileo Galilei
 
On this day in 1846, the planet Neptune was officially recognized. Rather than through basic observation, this was the first planet revealed by mathematical prediction. Galileo, of course, “made the call” in discovering Neptune, albeit as a star, almost 250 years earlier.
 
I like math. I like science. I love my wife. I don’t like people who trade on inside information. I don’t like consensus. I don’t like the perceived “authority of a thousand” modern day financiers.
 
In print at least, I’m rarely accused of being humble. And I probably won’t be a candidate to lead the National Groupthink Convention as their key note speaker either. I am who I am and very comfortable with it. I’m in it to win it every day for both my subscribers and hard working teammates. Every morning. Rain or shine.
 
I had to get that off my chest this morning. Once in a while I get a note from someone who is on the other side of an investment position as me who says they don’t like what I have to say because I “go at other people” or “call people out.” Only on the professional field of Wall Street would these tactics by which a strategist attempts to conquer be misconstrued for something other than a will to prove he is right.
 
Yesterday, we were right. But it no longer takes the Father of Science to figure out the dominating mathematical inverse correlation between the US Dollar and everything that’s priced in US Dollars.
 
Yesterday, the SP500 hit a higher-high for the year-to-date, and the US Dollar hit a lower-low. Since March, the US Currency has crashed (down -15%), and US Equities had the most expedited REFLATION in a generation (up +58%).
 
Yesterday, Marc Faber of the Gloom Doom and Boom Report, explained the Burning Buck thesis to Bloomberg: “where there is inflation in the system as defined by money supply growth and credit growth, you have currency weakness… stocks can easily go higher. If you print money, they can go anywhere.”
 
Today, despite my respect for the investment strategy works of Marc Faber, I am asking myself whether what I don’t like (consensus) is staring me right in the face.
 
Today, I am asking myself why not sell everything?
 
Today, I am asking myself 30 different ways how I can be wrong tomorrow.
 
Today is not the day that you are going to see how hard I am on myself.
 
Today is one more day where I wake up to make the risk management call.
 
Today’s setup in the US Equity market is as follows:
 
1.      The immediate term risk/reward in the SP500 has moved back to neutral

2.      Immediate term support for the SP500 is 1058 and resistance 1080

3.      The daily range I see in my probability model is 43 SP500 points wide; perfectly tight and tradable

4.      The Volatility Index (VIX) remains broken across all 3 of my durations, with the TRADE line being $25.14

5.      Volume studies flashed bullish yesterday with daily volumes accelerating on the up move

6.      US Market Breadth remains perfect, with 9 out of 9 SP500 Sectors flashing bullish on both TRADE and TREND

 
Globally, the setup is marginally less positive versus yesterday:
 
1.      America’s Creditor (China) doesn’t get paid with the Buck Burning

2.      China was down -1.9% overnight, breaking the immediate term TRADE line on the Shanghai Composite of 2908

3.      Taiwan, Korea, India – they all closed down, after the US market hit a new YTD high. Is Asia leading us, or are we leading them?

4.      Dr. Copper backed off his immediate term TRADE line, and hard – that line = $2.85/lb

5.      Oil continues to impute political power to the likes of Putin; the Russian stock market is up another +1.4% this morning and now +101% YTD

6.      The US Yield Curve compressed overnight (10’s to 2’s) to 244bps wide; still great, but not as great as everybody and their brother upgrades Goldman

 
The global macro catalyst that matters this morning is the Fed’s meeting. The US Treasury market might be smoking Bernanke out of his hole ahead of his commentary. I’m seeing 2-year yields breakout above my immediate term TRADE line of 0.99% to +1.02% and climbing. That’s a 1 month high.
 
If, Bernanke sees the recession “very likely” to be over…
 
If, Bernanke will see what I see coming in Q4 reported inflation accelerating…
 
Then, what will the US Currency and Treasury markets do?
 
This could get interesting. Then again, it always is. That’s why I love this game. I love making the call.
 
Best of luck out there today,
KM

 

 

LONG ETFS


SMH – Semiconductor HOLDRs We bought the semiconductor index on 9/21. We see demand creeping back with the book-to-bill ratio breaking 1 over the last two months.

EWG – iShares Germany
Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and balanced budget to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy. Merkel looks to be in the driver’s seat for re-election on September 27th, while her coalition partners are less certain.

CAF – Morgan Stanley China Fund
A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

 
SHORT ETFS

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 9/22.

LQD – iShares Corporate Bonds
Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

EWU – iShares UK We’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. We shorted EWU on 9/9.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


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