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New immigration facilities for Hong Kong residents visiting Macau will be in place by the end of 2009 at the ealiest.  Assistant director of immigration Eric Chan Kwok-ki said that authorities are considering extending “e-channel” facilities to Macau and dispensing with arrival/departure cards for Hong Kong permanent residents.


YUM will likely make the numbers and maintain its FY09 10% EPS growth target.  YUM typically makes the numbers and consistently beats earnings expectations.  With YUM, it is the earnings quality that deserves more attention.  As we saw in 2Q, management optimism about the top line sales will be reined in. 


In 2Q, despite softer than expected sales trends, the company beat street expectations, helped by a significantly lower than expected tax rate.  Management highlighted that although this lower tax rate resulted in the company decreasing its full-year tax rate guidance to 25% from 27%, on a YOY basis, the forecasted tax rate should provide a slight EPS headwind in 2H09.  Additionally, during the 2Q earnings call, management had said it was not anticipating any share repurchases in the back half of the year and that the company’s share count could actually increase in 4Q09, which would have marked the first time the company’s share count had not declined on a YOY basis since 1Q05.  After that earnings call, I was interested to see how YUM would make the numbers with fewer strings to pull.  To that end, YUM announced this week that it would resume buying back stock following the Board’s authorization of a $300 million share repurchase program. 


Unit growth and lower YOY commodity, G&A and interest expenses will all play a factor in making numbers in 3Q09 (and now a lower share count will help to make full-year numbers).  Not all of these earnings drivers fall in the financial engineering category, but along with a lower share count, I would argue (as I always do) that YUM is pushing too hard on unit growth, particularly in China and YRI, as it helps drive earnings growth.  In 3Q09, YUM will continue to push unit development to offset slowing same-store sales growth. 


Like its peers, YUM will benefit from commodity cost favorability in the back half of the year in both the U.S. and China, though the YOY benefit will be of a greater magnitude in the third quarter.  G&A expenses will continue to come down as the company is working to reduce its G&A cost structure by $60 million in the U.S. in FY09 (already achieved $20M in Q1 and $18M in Q2).  YUM’s goal to refranchise 500 units in the U.S. will also help the G&A line going forward.  Commodity costs will not come down forever.  The YOY favorability combined with reduced G&A is working to offset continued sales weakness.  This trend is no different from any other restaurant company right now.  Like we saw earlier this week, DRI beat EPS estimates despite sales weakness, but investors seemed most focused on what the company had to say about sales going forward and that was not good.  I think the same story will play out for YUM. 


YUM already significantly reduced its full-year sales guidance following 2Q results.  Flat same-store sales growth in China for the year is achievable and represents a significant deceleration in 2-year average trends.  The company’s 3% comparable sales growth guidance for YRI assumes the company maintains its 2-year average trends for the balance of the year, which could be at risk.  In the U.S., YUM’s guidance stated that same-store sales will be down slightly.  I am convinced that full-year same-store sales will be down as well, but I would be interested to get some clarity around that “down slightly” guidance and that could prove to be one of the real telling points of the quarter as it relates to YUM’s stock performance following the earnings release. 


In my opinion, investors could be expecting too much out of KFC this quarter.  Yes, the Kentucky Grilled Chicken launch during the second quarter boosted KFC same-store sales to +3% from -7% in Q1 and consistently negative performance prior to that.  Management highlighted that following the initial launch that sales flattened.  As everyone knows, we are in an extremely difficult operating environment and those post-launch results are likely more relevant relative to 3Q performance.  KFC is lapping a -4% comparison but easy comparison no longer matter.  Pizza Hut’s underlying trends will most likely be little changed from 2Q when same-store sales declined 8%.  And Taco Bell, which was up 1% in 2Q, will continue to be pressured by the increased discounting of its peers.  For reference, both Pizza Hut and Taco Bell are facing difficult comparisons from 3Q08 when same-store sales growth was up 8% and 6%, respectively.  Even with these difficult sales trends, U.S. operating profit should continue to improve during the third quarter.  I would expect this operating profit growth and improved margin performance to reverse in the fourth quarter as the company will be lapping its first quarter of growth since 3Q08. 


Management already lowered its full-year U.S. operating profit growth target following 2Q to high single digit growth from up 15%.  I would not be surprised to see this number come in even below the revised guidance.  It would not be the first time YUM’s U.S. operating profit guidance was too optimistic.




The Economic Data calendar for the week of the 5th of October through the 9th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.  


Monday Oct. 5


North America

At 10 AM ISM Non Manufacturing Index data for September will be released. At 1 PM on Monday, the Treasury will reopen 10 year TIPS.



On Monday, Reuter’s PMI -Services for September will be released for the Eurozone, Germany, France, and Italy while CIPS will release Services PMI in the UK.



September CPI will be released for both Taiwan and the Philippines on Monday, with Taiwanese data arriving in the morning and the Philippines figures arriving in the evening. In Singapore, September PMI will be announced in the morning while in Australia, the monthly RBA board meeting begins in the evening shortly after Balance on Goods and Services data for August is scheduled for released. China’s Markets will be closed on Monday and Tuesday in observance of the National Day holiday.



Tuesday Oct. 6


North America

The treasury will auction 3 year notes on Tuesday at 1 PM. Weekly ICSC, Redbook and ABC Consumer Comfort index data will also be released at normal scheduled times. In Canada, IVEY PMI for September is scheduled for release at 10 AM.



UK Industrial and Manufacturing Production figures for August will be released in the early morning.



August Housing Finance data will be announced in Australia during the evening on Tuesday, as will September FX reserves for both Japan and the Philippines.  China’s Markets will be closed on Monday and Tuesday in observance of the National Day holiday.



Wednesday Oct. 7


North America

At 1 PM on Wednesday the treasury will reopen its 10 year note auction while at 3 PM Consumer Credit for August will be released by the Federal Reserve.  Weekly MBA Mortgage application data will be released at the normal time as will EIA oil gas and distillate stock levels.



The third release of Q2 GDP for the Eurozone is expected at 5am, including the second release for Q2 Household Spending, Gross Fixed Capital Formation, Government Expenditure, and Exports and Imports. Germany will release preliminary Factory Orders for August.



In Japan, Leading Index levels for August will be published in the morning and September trade balance and August current account data will be issued in the evening. Taiwanese September Exports will also be released on Wednesday morning, as will FX reserve levels from September for Hong Kong, Malaysia and Singapore. At 8:30 PM Australia’s official unemployment rate for September will be announced.



Thursday Oct. 8


North America

August Wholesale Sales and Inventory data will be announced at 10 AM and the treasury will reopen auction for 30 year bonds at 1 PM. Weekly Initial Claims, M2 and EIA Natural gas stocks data will be released at the normally scheduled times. In Canada, September Housing Start data will be published at 8:15 AM.



French Trade Balance figures for August are scheduled to be released on Thursday morning. The ECB will meet to discuss the Refi Rate and official announcements should come at 7:45AM.  Preliminary annual German Industrial Production numbers for August will also be released.



August Trade data will be announced in Malaysia on Thursday morning while in the evening August export levels will be issued at 9PM and South Korean PPI for September will be announced at 11 PM. Weekly Wholesale Inflation will be released in India.



Friday Oct. 9


North America

Census Bureau Goods & Services figures for August will be announced at 8:30 AM.  Canada has a slew of data points scheduled for release on Friday morning including Merchandise Trade for August, the September Unemployment Rate and BoC Outlook and Loan Officer survey figures for Q3.



Friday brings a host of major data points:  UK PPI and Trade Balance data for September as well as August Industrial and Manufacturing Production figures for Italy and France are scheduled for release in the morning.  Germany will announce its Trade Balance for August while Italy will release Industrial Production.  Both Norway and Germany will issue CPI levels for September. In the UK HBOS will release September House prices.



There are few major data points slated for release on Friday among the major Asian economies.


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Today’s unemployment report hitting another new high is dollar bullish!


U.S. employers cut a larger-than-expected 263,000 jobs in September; pushing the official unemployment rate to 9.8%.  Today’s print represents a 10 basis point increase from the previous peak, but a deceleration versus the 30 basis point jump last month.  In the rear view mirror, the improvement in August now appears to have been a statistical blip.   


Today’s unemployment rate (in terms of its growth) is, on the margin, US dollar bullish and bearish for equities in turn.     


Since the start of the recession, the number of unemployed people has soared by 7.6 million to 15.1 million in total.  While the worst of the labor market deterioration may be over, the trajectory of job losses is still positive. 


The “jobless recovery” now appears to be firmly entrenched, as corporate America appears unconvinced that the economy is truly on a rebound.


Howard Penney

Managing Director






With some states releasing September gaming revenue figures next week, year-over-year comparisons could provoke some ill-founded optimism.


Over the next three weeks, gaming revenues will be released by the states and we expect that these figures will show the regional gaming industry through rose-tinted glasses.  The delta will look much better than August.  However, looks can be deceptive. Labor Day fell on September 1st in 2008, which means that most of the weekend’s gaming revenues were collected in August.  Labor Day this year was on September 7th, which resulted in all of the Labor Day weekend gambling revenues being attributed to September.  This calendar effect significantly contributes to the easy comparison for the coming monthly revenue figures that is shown in the chart below.




The hurricanes of 2008, Gustav and Ike specifically, destroyed homes and businesses in many Southern states last September, with Gustav making landfall during the Labor Day weekend.  Louisiana and Texas were hit particularly hard which had an adverse effect on the casinos’ revenues in Louisiana.  While the hurricanes had a broad impact on the gaming market in Louisiana, some properties were impacted more severely than others.  L’Auberge du Lac was closed for nine days, Boomtown New Orleans was closed over the Labor Day weekend (Pinnacle even had to close the Admiral riverboat in St. Louis for seven days due to flooding caused by Ike).  Delta Downs and Treasure Chest closed twice for a total of 10 and 13 days, respectively, including two weekends - one of which was Labor Day.  The impact on Louisiana’s gaming revenues is clear to see in the Lousiana Delta Chart.




The headline figures for states’ revenue releases could prompt an overly positive reaction among some investors in the coming weeks.  The Louisiana comparisons will not be helpful.  For the rest of the country, combining August and September 2009 and comparing to August and September of 2008 will give a more telling indication of the health of regional gaming.


The Global Oil Chess Board

Position: Short Oil via the etf USO


A couple of quick call outs this morning from the global oil chess board.  We discussed some of the regional dynamics in our recent Oil Black Book (please email for a copy if it is part of your subscription or if you would like a copy) and are seeing these points highlighted this morning.


The Russians announced their September oil production this morning, which exceed 10MM barrels per day.  Interestingly, this is almost 25% more than its nearest rival Saudi Arabia and is a monthly record for Russian monthly oil production.  Obviously, with such a share of the global oil market, the Ruskies are incentivized by high prices. To wit, Russian President Dmitry Medvedev noted on Thursday that, “$80 to $90 per barrel would be a fair price for oil in the current economic environment.” Indeed.


The juxtaposition with Russia is, of course, China.  Below we have a chart that shows Chinese oil production versus Chinese oil consumption going back to 2000.  This quick and dirty analysis shows the % by which consumption exceeds production.  Back in 2000 consumption exceed production by some 50%, as of the most recent data this number is now above 100%.  Because of her dramatic growth in oil consumption over the last decade, China has become increasingly dependent on foreign sources of oil.


Do you think Chinese needs and Russia’s supplies are going to shape the relationship between these two powers? You bet your Madoff they are!


Daryl G. Jones

Managing Director


The Global Oil Chess Board - a1


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