In 3Q09, many QSR operators are struggling to generate incremental visits.  Clearly, the only defense to declining traffic trends is discounting.  This puts QSR margins at risk as companies broaden their discounting schemes.  At the very least, any upside that may have been generated from lower food costs is now being given back to the consumer.


The following new menu changes/promotions signal ongoing guest traffic challenges for the QSR group.


Burger King announced last Friday that starting October 19th, it will be rolling out its $1 double cheeseburger; though some franchisees wanted to shelve the product to protect margins.


Chipotle announced last week that it will be offering free kids meals at its Boston restaurants for three days when a parent purchases a burrito, full-size salad or burrito bowl, or order of tacos.  CMG is running the promotion as a way to test its children’s menu, which is now available. 


I saw a MCD commercial yesterday in Chicago that said drip coffee is now available for $1.  While MCD is testing a $1 breakfast menu in Chicago, the commercial suggested you can get a $1 coffee all day long.  And, I have heard that the company is promoting “2 for 1” children’s meals in some markets. 


In this environment, what MCD does with its current discounting efforts affects nearly every restaurant operator in the country.  A client recently sent me this map of where MCD stores are located.  Yes, we need to pay attention to what MCD is doing!



Chart of The Week: As Good As It Gets...

The three major drivers of Wall Street Bankers getting paid in 2009 are as follows:


1.       The Buck Burning

2.       The Yield Curve

3.       The Associated Resurgence in M&A


At this stage of the game, most people understand that a Burning Buck equates to REFLATION in everything priced in US Dollars. From US Denominated Debt to the Financial Services companies that slog around with those liabilities, Dollar down got the Bankers and Debtors paid.


The Yield Curve, however, doesn’t get as much airtime. Give it some time. It will…


Andrew Barber and I have shown the peak of the yield spread (10-year US Treasury yields minus 2-year yields, in basis points), which, not surprisingly came at +276 basis points wide in May of Q209. Since that peak, the yield spread has made a series of lower-highs. This morning’s yield spread is hitting a 6-month low at +234 basis points wide.


On the margin, lower-highs have an implied question. For the bankers who are able to borrow short and lend long, is the rear-view in the Yield Curve as good as it gets?



Keith R. McCullough
Chief Executive Officer


Chart of The Week: As Good As It Gets...  - a1




SEPTEMBER 28, 2009





Ok, so here’s a winner. Gander Mountain (GMTN) announced its intent to go private this morning. Aside from the fact that retail has largely been left out in the cold as it relates to LBO activity this year – therefore making any transaction notable – the specs behind this one are particularly squirrely.


The two largest shareholders are making a bid of $5.15, which is 38% above Friday’s closing price. Sounds nice, huh? Not so much when you look at the fact that this is the same level where the stock was to months ago, and since then GMTN has underperformed retail (MVR) by 64%. 


But it’s not the price that catches my eye as much as the structure of the deal. The company will do a reverse stock split of 1 to 30,000, and then will then payout a $5.15 equivalent to anyone with less than a share. Based on the current holder list, this means that anyone but the largest 14 holders will be forced to sell. Score one for the big guy.


With only 25% of the shares floating, that makes it tough, if not impossible, for any opposition to have any relevance whatsoever. What if you’re a little guy that bought into the bankers’ and sell-side analyst ‘pie in the sky’ pitches when the deal came out in September 2004? At that time there were 9 analysts covering, sales were growing at 32%, and the pitch was for a 1% operating margin to go to the mid-high single digits. Now there’s 1 analyst covering, sales are struggling to maintain a low-single digit rate, margins are below 1%, and the company still has yet to earn one red cent.


Maybe the problem is not as much with the current deal as it is with the fact that this deal should never happened in the first place. Man…I remember being on the buy-side in Sept ‘04 and having my sales guy at an unnamed regional firm beating the drum on this puppy telling me I was missing out on a ‘big idea'.


Despite all the noise about better ‘transparency and accountability’ it’s amazing the stuff that still goes on.


Buyer beware…





Some Notable Call Outs


  • In perhaps the most dramatic example of rent renegotiations that we’ve seen, FINL management suggested on its conference call Friday that it has achieved rent reductions approaching 50% in some cases. With nearly 40% of its real estate portfolio set for some level of negotiation over the next 18-months, the company is poised to realize reductions in occupancy cost ahead of most peers during this time period. In addition, FINL is accelerating the closing of underperforming stores by year-end further contributing to profitability.


  • COLM introduced a new twist on green last week with its reused box initiative for online customers. Quite simply, the concept is to give outdoor customers the option of using a repurposed box for shipping. In what would be considered a positive response by most, more than 60% of online customers have selected the option in its first month of operation.


  • Despite sporting one of Europe’s weakest retail markets, Spain has announced as part of its 2010 budget bill that it will be increasing its VAT to 18% up from 16% in addition to cutting certain tax rebates. While some far east countries have been reducing VAT rates, Spain’s hike is the first raise that we’ve seen in this cycle. This may help the country tackle budget deficits near-term, but it do little incentivize the country’s consumers to accelerate already weak spending.





-Canadian Trade Group Finds No Injury From Footwear Dumping - The Canadian International Trade Tribunal found that the dumping of waterproof footwear and waterproof footwear in nearly finished form from the People's Republic of China and the Socialist Republic of Vietnam had not caused and was not threatening to cause injury to the domestic industry. Anti-dumping duties will therefore not be collected by the Canada Border Services Agency. The complainant in this case was the Shoe Manufacturers' Association of Canada, of Baie d'Urfe, Quebec.

Pasted from <>


-Textile Groups Urge U.S. to Act on Honduras - U.S. trade associations representing the fiber, textile, apparel, import, and retail industries wrote to Secretary of State Hillary Clinton, urging her to take immediate steps to restore stability in Honduras. In the letter, the groups said that the current political crisis in Honduras "has caused commercial traffic to falter dramatically, and textile and apparel plants in United States and Honduras are already being idled and workers told to go home." The letter was signed by the following trade associations: American Apparel and Footwear Association (AAFA); American Manufacturing Trade Action Coalition (AMTAC); National Council of Textile Organizations (NCTO); National Textile Association (NTA); National Cotton Council (NCC); and the U.S. Association of Importers of Textiles and Apparel (USA-ITA). <>


-New Look set for IPO - New Look is set to return to the stock market with a float early next year, six years after it was taken private. The retailer, which is owned by founder Tom Singh and private equity groups Apax and Permira, is reportedly considering a £1.7bn IPO. < >


-Australia’s largest department store group Myer has released the details of its initial public offer – It expects to raise as much as $2 billion. Myer’s shareholders, including Texas Pacific Group and other investors are offering between 479.3 million and 499.5 million shares by both selling off their existing stakes in the company and issuing new shares, according to an ipo prospectus distributed Monday. Myer’s shares will be priced between 3.90 Australian dollars and 4.90 Australian dollars, or about $3.39 to $4.26, when the offer kicks off next month. The ipo will be the ASX’s biggest listing in three years. <>


-After a challenging 12 months, the president and COO of Saks Fifth Avenue is forging ahead with a fresh footwear strategy to make the retailer more competitive in the challenged luxury segment - Among the key initiatives: tweaking the product assortment to include more contemporary brands, ramping up exclusives, introducing private label and expanding elements of the 10022-SHOE salon concept across the chain. Already, the retailer’s new efforts are paying off. Frasch said that although he remained cautious, early fall results have been promising. <> Merges with - said it merged with to form a newly named company, The new online sporting goods retailer headquartered in Washington, Utah, focuses on baseball and softball equipment. <>


-Hibbett Sports Honored by State of Alabama  - Hibbett Sports, Inc. announced that Alabama Governor Bob Riley has proclaimed Tuesday, September 29, 2009, Hibbett Sports Day for the state of Alabama. Governor Riley’s declaration cited Hibbett Sports' contributions to the community through the Hibbett Sports Operation Sports Renovation and the Hibbett Sports Superstars programs. <>


-Handbag brands Kathy Van Zeeland and B. Makowsky are making the move into footwear with a team of industry veterans - The B. Makowsky footwear line, which debuted during the FFANY show, is launching for spring ’10. Kathy Van Zeeland is expected to follow for fall. The moves come on the heels of last year’s $330 million acquisition of New York-based Van Zeeland Inc., which included the Kathy Van Zeeland, B. Makowsky and Tignanello lines, by LF USA, a subsidiary of Hong Kong-based global sourcing firm Li & Fung Ltd. Plans for expanding both lines developed quickly after the deal, said Rick Darling, president of LF USA. <>


-Billy Reid is going deeper into footwear - The Alabama-based designer will debut a women’s shoe line for holiday ’09 and plans to launch a wholesale business for his men’s styles starting with spring ’10. (The designer also just opened a shop-in-shop in Bloomingdale’s in New York.) “Over the past couple of years, footwear has really been a good category for us, so the timing seemed right,” said Reid. The women’s line will start small and grow for spring ’10. The initial holiday offering includes a high-heel boot, a riding boot and an ankle bootie, retailing for $495 to $795. All of Reid’s creations are made in Italy. The new collection is a departure from Reid’s previously planned women’s launch a season before, which included several pumps and wedges. His factory went out of business, and the designer had to start over with new ideas. <>


-eBay’s mobile channel has generated $380 million in sales this year - EBay Inc. has made big news in the world of mobile commerce, becoming the first online merchant to break out m-commerce sales, and with good cause: Its mobile app for the iPhone and its m-commerce site,, have generated $380 million in sales so far this year. <>


-Shoe Trends - Men’s sneakers aren’t just black and white. This season, it’s all about the softer shades in between. Whether dressed up or casual, alone or accented with color, gray is clearly the new black. Spring footwear is getting cool and breezy with perforated uppers for men and women. Some athletic brands also put a twist on the treatment with bright colors and bold shapes. <>

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Smile and Nod

“Well done is better than well said.”
-Benjamin Franklin
On Friday, I used a Thomas Jefferson quote. This morning, I figured I’d keep rolling out the red carpet for America’s men of character. With Washington’s politicians giving nothing but faint lip service to America’s Currency and Credibility Crisis, God knows we need some leadership and guidance.
Relative to the range of possibilities I had in my head going into this weekend’s G-20 meetings in Pittsburgh, nothing really happened. They talked about bankers bonuses. They talked about balancing fiscal deficits. They talked and they talked. They didn’t actually do anything…
At least, somewhere along the lines of his 3-days Smile and Nod meetings with the Chinese, President Obama was slipped one of our Early Looks on Chaos Theory (“Bridging Chaos and Hope”, 9/24) . Check out this prefacing quote from Obama himself: “Because our global economy is now fundamentally interconnected…” Nice!
So, no matter where you go this morning, here we are – right in the same spot that we started ahead of the G-20. While the US Dollar finally had an up week (its first in the last 4), closing up a paltry +0.5% at $76.81, it remains broken across all three of our investment durations (TRADE, TREND and TAIL). The US Treasury Secretary’s impact on global currency markets is basically negative at this point. That’s both embarrassing and sad.
So where do we go from here? Should we fire up the Crash Calling engines again – you know, the ones that seem to find their way into the daily double of CNBC’s manic news-flow every time the SP500 drops a percent? Or should we just take a deep breath, see this market’s current risk management setup for what it is, and deal with it?
Tobias Levkovich, a sell side strategist at a government sponsored bank (Citigroup), is calling for the SP500 to hit 1000 this morning. A perfectly round number… A perfectly useless forecast. There is a reason why most of the real Stock Market Operators in this business say that the sell side shouldn’t make “market calls” – it’s because they can’t!
President Obama is right. Managing risk in this increasingly interconnected global market of colliding behavioral and mathematical factors is the future of fiduciary responsibility. White House strategists, don’t worry – he didn’t say that specifically yet, but you can poach it from me. Other people are fine with doing the same.
After watching Brett Favre stick one in the back of the end zone yesterday with 2 seconds left to get the “W” for the Minnesota Vikings, I am inspired to make a call this morning. Into month end (Wednesday), I’ll take the other side of Levkovich.
Here’s my call:
1.      Two lines matter in the US stock market right now: SP500 support at 1035 and US Dollar Index resistance $77.61.

2.      If those two lines hold, there’s immediate term upside in the SP500 to 1060 and US Dollar Index downside to $75.81.

3.      If they don’t hold, you are going to see follow through selling in everything REFLATION trade, like you saw last week.

Ahead of last week’s -2.2% selloff in the SP500, it paid to proactively manage risk. We did that by doing what we call BETA Shifting DOWN as US and Global Equity Markets were getting overbought into a US Dollar getting oversold. Our Asset Allocation positioning included the following holdings next to a 47% position in US Cash:
1.      US Bonds 19% = TIP (Treasury Inflation Protected Securities)

2.      US Equities 6% = XLV (US Healthcare ETF)

3.      Int’l Currency 10% = CYB (Chinese Yuan)

4.      Int’l Equities 9% = EWG (Germany) and CAF (China)

5.      Commodities 9% = GLD (Gold)

We don’t own oil. We don’t own copper. In terms of Commodity exposure, we simply own gold, and that will not change this morning. We flashed this as last week’s Chart of The Week when it broke, and Dr. Copper remains broken from an immediate term TRADE perspective. That line in the sand is $2.85/lb. Copper was down -1.5% on the week last week, closing down for the 4th consecutive week, reminding us that owning anything China is riskier than it was when we bought China 9 months ago.
Critically, the price of West Texas Crude Oil broke both its immediate term TRADE and intermediate term TREND lines last week. Those lines are $70.83 and $68.94, respectively. While there is long term TAIL support in the $58/barrel range, there is absolutely no reason for me to buy back what I sold (USO) higher anytime soon. This is where you get paid to do nothing.
US Healthcare (XLV) was the best performing sector out of the 9 we follow in Howard Penney’s SP500 Sector Risk Management product on both Thursday and Friday. Meanwhile, Germany (EWG) is flashing what we call a positive divergence versus the rest of Europe this morning, trading up +0.7% after “Angie” (Angela Merkel) successfully won the election this weekend. The German election was one of Matt Hedrick’s major macro catalysts. Great call by our German speaking analyst.
On the International Equity side, I’ll be right on Germany and Japan this morning but wrong on China. Chinese equities got smacked last night, trading down a -2.7% on the Shanghai Exchange. Dr. Copper and China have very high positive correlation to one another in 2009. I should have sold my CAF when I sold Hong Kong (EWH).
“Shoulda, coulda, woulda”, as we ice men from Thunder Bay would say, doesn’t matter. “Better done is better than well said.”
Best of luck out there this week,




EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats over the weekend. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. 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.

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. We like defensible growth with an M&A tailwind. 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.


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.

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.


Our very own Anna Massion was in Macau and here are some notes from her trip.



MACAU TAKEAWAYS                                                                                                                              


Commission caps:

  • Went into effect on September 22, but the government won’t check until Oct 1, 2009
  • The cap is set at 1.25% or 44% caps for revenue share properties
  • Rooms will be included in cap at a rate at “cost”. which the government estimates as 40% off of advertised room prices
  • F&B will be included in cap at a rate of 30% off advertising pricing
  • Should be easy to enforce since the government gets the numbers daily from the operators and there aren’t many “secrets” in Macau
  • Should be mildly positive margins for the operators that pay above those rates
    • Altira if it ever gets back to where it once rolled
    • Galaxy rumored to be at the high end of the payout scale

Lowering the tax rate:

  • Unless the Macau market is materially negatively impacted by Singapore for more than just a few months there is no reason for the government to seriously consider a tax cut

Visa Restrictions:

  • Restrictions were clearly eased, some say as early as July
  • The reason the restrictions were put there in the first place was to help keep visitation manageable given the current infrastructure constraints
  • There is some fear that if growth becomes unmanageable again that the government will once more restrict visitation

Other random impressions:

  • China stimulus is having a big impact on growth, especially VIP growth
  • There seems to be some confusion about whether quoted revenues of 10bn MOP is an extrapolated number for all of September or a month-to-date number
  • People are feeling more confident about the economy
  • Some don’t believe that Singapore will have a large impact on Macau. The vast majority of the visitors are Chinese coming from Guandong.  The properties with the highest exposure to fly in high rollers from SE Asia & ME will see some impact
    • South & SE  Asia made up almost 7% of the visitation into Macau on a trailing 12 month basis (from July).  Surely some of that visitation will now go to Singapore – at least on a trial basis, or visit Macau less frequently
  • Macau is definitely getting more and more westernized, more and more non-Asian tourists there
  • More people are playing slots ... this was the first time we noticed people playing slot machines
  • Lots of people are coming on package vacations for one day or so and are spending no money – they visit properties but leave without gambling.  Unfortunately, lots of them seem to be going to CoD
  • Macau property market is hot again



  • Macau Junkets don't think they will be in Singapore given the regulatory hurdles
  • It took IGT 9 months to get licensed and IGT is licensed everywhere
  • LVS likely a May/June opening



  • It seems unlikely Wynn will get back to the high teens market share it once enjoyed before the opening Encore, and even that will not guarantee more share; MGM is finally focusing on its operations and CoD has been additive to the market
  • It is unclear exactly why Wynn is doing this IPO but some ideas include:
    • Given his history, he doesn’t like being levered
    • He’s getting old so wants to cash out some while the market it hot
    • Wants to be more “Chinese” than Sheldon
    • Will use the money to eventually build out Cotai
    • Looking at acquisitions (Fontainbleau/ Bellagio)
    • Aqueduct
    • Our view is that since there is no corporate income taxes on Macau gaming profits, it is more efficient to separate as much of Macau operations as possible from the parent (WYNN)



  • Sands should be negatively impacted in 2010 when Oceanus opens.  It is unclear as to how much, but there will certainly be some negative impact
  • Venetian continues to do well, FS should ramp over time.  Good mass business just takes longer to develop
  • Sometimes it's all about perception and press, and the locals are clearly sore about the fact that LVS stopped construction on sites 5 & 6 and fired a lot of people while continuing to construct Singapore
  • We would be surprised if the government doesn’t make them promise to complete 5 & 6 as a pre-condition to the IPO.  So, the hope is that WYNN’s IPO will be white hot, and that LVS can ride on those coattails.  
  • Sites 5 & 6 will likely take at least 18 months to complete so we don’t see anything opening before end of 2011/early 2012.  LVS will have to raise more debt to complete the construction



  • Building a mass business won’t be easy and will take longer than most probably hope.  The jury is still out on whether this property will be able to generate a successful mass business
  • They have 35,000-40,000 visitors daily. Unfortunately that visitation isn’t turning into $$$ yet.  Their mass is still only 30% of Venetian’s despite visitation being 60-65% of Venetian’s run rate.     
  • Commission caps should be incrementally positive for them since they are known to pay the most
  • Says september is definitely slower at CoD- especially mass business. VIP is good though think that october will be better
  • Crown is all VIP. Hardrock all Mass.
  • Crown towers have 92-94% occupancy



  • Will announce scope and completion of their Cotai project by year end, hearing it could be as early as end of 2010 for Phase 1



  • We heard that they held very high for the first three weeks in September
  • Generally doing very well from a share standpoint – they clearly appeal to a specific market
  • L’Arc seemed to open smoothly and Oceanus should do well given the location



  • They are finally focusing on the property
  • MGM is simply too nice of a property not to generate at least $200MM of EBITDA and is on its way of doing just that now that management is focusing on running the property
  • The company has doubled the number of junkets operating there
  • They are planning an IPO for next year. They just want to take some money off the table and have a HK listing, plus they can certainly use the cash



Unemployment in Macau for June to August 2009 rose by 0.1% when compared to the May to July period, to 3.8%.  Underemployment stayed the same at 1.9%.  On a year-over-year basis, the unemployment rate rose by 0.8%.  The employed population decreased by 1,700 from the May to July period to 318,800.  Employment in retail trade and construction saw decrease, while employment in restaurants and similar activities registered an increase. 



Wynn Resorts’ $1.6 billion IPO is more than 10 times covered, according to a source familiar with the deal.  Most of the interest for the unit has come from Asia and the company favors at least 50% of the offering going to Asian investors.  The retail part of the offering was some 50 times covered in the first few hours.



August saw 2.06 million visitors coming to Macau, a 6.4% increase over the same month of last year.  On a sequential basis, the number of arrivals rose by 17.7%.  August’s figure was the highest since March 2008, when 2.13 million people visited Macau.  50.9% of the visitors were mainlanders in August, reaching 1.05 million, up 8.9% year-over-year.

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