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Chart of The Week: Volatility Is Back

With the US stock market hitting its intraday highs here in the morning session, the Volatility Index (VIX) is hitting its intraday low. The SP500 is currently +1.1% at 1035 and the VIX is down -4.3% at 27.46.


That’s the most immediate of immediate term (as in 3 hours) views! It’s also rear-view. Prospectively, you learn a lot from that rear-view data. Despite this morning’s moves, I see three very dominant macro lines to consider:

  1. SP500 immediate term TRADE resistance 1040
  2. US Dollar immediate term TRADE support $76.09
  3. VIX intermediate term TREND support 26.19

Andrew Barber and I chose the VIX as the Chart of The Week, not knowing what this morning would bring – and to some extent, using the 3-factor risk management model of SPX/USD/VIX above, we didn’t really care. Provided that the VIX holds this newly established intermediate term line of support, we know what our strategy will be.


Context here is critical (see chart). The VIX has put on a powerful +20% move in the last 2 weeks. This happened right on time, with US Equities failing to make higher-highs after the critical Outside Reversal day of September 23rd.


From a long term TAIL perspective (red line in the chart below), the VIX is broken. But that line includes the highest VIX readings EVER (not in this chart, Q408). Overall, the point here is to Acknowledge Reality. As the US Dollar makes higher-lows, and the SP500 is making lower-highs, the VIX is breaking out on both an immediate and an intermediate term basis, with no resistance of consequence until it gets closer to 40.


As opposed to where we stood in US Equities for most of Q2/Q3 (buyers of equity weakness), for now we are sellers of US equity strength.



Keith R. McCullough
Chief Executive Officer


Chart of The Week: Volatility Is Back - a1


Anticipating Solid September Sales

Anticipating Solid September Sales

OCTOBER 5, 2009




Another month has passed and we all know what that means. Same store sales day is Thursday with the reporting of September sales results. As we have pointed out in the past, the relevance of sales day ex- Wal-Mart is shrinking, but we still can’t ignore the inherent volatility, speculation, and excitement that this day is sure to bring.


So what do we know heading into Thursday’s report? First, there is no question September was a good month for same store sales. Reported results will largely be positive on an absolute basis driven in part by the Labor Day shift earlier in the month, in part by easing comparisons (both on a weekly basis and for the month) and to a lesser extent a slight uptick in overall apparel/footwear demand. Over the course of the past five weeks, the marketplace has ranged outright euphoric (at the beginning of the month) to generally positive.


Additionally, we have heard specific commentary from PVH and WRC, both commenting on a sequential pick up in their respective retail businesses. PVH also suggested that the department store channel was seeing an uptick and went on say that some Fall orders were being pulled forward to meet current demand. The weekly SportscanInfo apparel and NPD Footwear data also showed that September was a better month, although trends in both data feeds did show sequential deceleration over the past three weeks.


Anticipating Solid September Sales - 1


I am pretty sure the combination of very positive whispers surrounding September sales, coupled with confirmation of these trends from a handful of retailers leaves expectations high as we approach the reporting of actual results. Remember this month marks the beginning of a four month period where year over year comparisons for almost every retailer will ease to some of the lowest levels in recent history. There is no question inventories are tight (and light), comparisons are easy, and underlying demand is stable. Ultimately the set up for a trade on Thursday’s results hinges on expectations and not on reality. The reality is the results will look good and will continue to fare well for the next few months. None of this is new of course, this is a set up investors, The Street, and the retailers have all been anticipating for several months now. Recognizing it is both difficult and usually inaccurate to make a bold sales day prediction, I still believe that the day may be ultimately be marked by relative disappointment. That’s not to say reported trends and commentary won’t be positive, it’s just highly anticipated at this point.


Eric Levine   




Some Notable Call Outs  


  • Warnaco sized up their international business potential with a focus on retail store expansion. With same store sales from international stores up 3.3% Q3 to date (an acceleration from Q2 which was up 1%), WRC believes they can double their current 1000 store base in 5 years. Over that same time frame, 30% of total revenue would be driven from CK international retail. Asia and Europe will remain the key markets to obtaining this goal.


  • As a result of conservative inventory management, Columbia Sportswear has not taken a speculative inventory position on Fall apparel/outerwear as it has traditionally done in the past. Recall that the highly outerwear-dependent fourth quarter can often be impacted by weather anomalies, leading to both upside and downside depending on the level of at-once ordering. Any uptick in holiday demand due to inclement weather or overall demand this year will likely drive better margins but will not have a meaningful impact on revenue.





-Baby Boomers led the decade’s consumer spending spree, but Generations X and Y will likely be at the forefront of a recovery - Panelists at Retail Forward’s 2009 Strategic Outlook Conference on “Retail Renewal” at the Marriott Marquis, Frank Badillo, vice president and senior economist at Retail Forward, said the U.S. should see a pickup in GDP growth in the fourth quarter, with an uptick in GDP throughout 2010. Badillo expects the younger generations to help boost the specialty channel, which is where that demographic segment typically shops. Boomers, however, are the core shoppers at department stores, and they are focused on rebuilding savings and equity drained by the recession. Lois Huff, senior vice president, said while Boomers still constitute a large share of the population and spending power, the “engine of the Boomer has run out of gas.” Gen Xers haven’t pulled back nearly as severely as Boomers in the past year, and Gen Y has been constrained even less, she said. <wwd.com/retail-news>


-Top US sport participation report - Over the past eight years, team sports participation has fluctuated up and down, affected both by social trends and economic headwinds. Below, the most popular team sports among athletes six years and older and their changes since the start of the decade: 1) Basketball, Participation 26.3 million, 8-YR Change: 0.1%, The ultimate court sport continues to dominate all others when it comes to participation in the U.S. Consistently likeable since its origin, basketball is an affordable activity for children, teens and adults, particularly in the current recession. And while many companies are bullish on the b-ball market, Nike has pulled out all the stops, releasing a number of innovative designs in 2009, including the Hypermax, Zoom Soldier and Shox Vision. 2) Baseball, Participation 15 million, 8-YR Change: -5.2%, Though it’s still considered “America’s pastime,” baseball has seen a significant decline in participation among Little Leaguers, possibly because there are more sporting options for kids now than in the past. Nike, yet again, scores as the MLB footwear of choice, especially among the New York teams, the Yankees and the Mets. 3) Outdoor Soccer, Participation 14.2 million, 8-YR Change: N/A*, The international language of the sports world is played in more than 200 countries, and has become one of the most popular, co-ed sports in the U.S. Helping to fuel the flames are product collaborations such as David Beckham’s deal with Adidas last year to create Beckham Predator PowerSwerve TRX FG soccer cleats, the same cleats he wore during the 2006 FIFA World Cup. 4) Volleyball, Participation 8.2 million, 8-YR Change: N/A*, Volleyball is spiking in popularity among high schools and colleges in the U.S. Though most athletes tend to favor a relaxing game on the beach, an estimated 46 million Americans play this physically demanding court sport. Players must be able to leap, dive and perform to their fullest, and many have said they favor gel-cushioned Asics sneakers for indoor games. 5) Football, Participation 7.7 million, 8-YR Change: -6.5%, Football has seen a heavy drop in participation over the last few years, especially when it comes to organized and sanctioned play, which has been surpassed by casual, pick-up games. The SGMA estimates the trend may have something to do with families feeling the economic pinch. Nevertheless, footwear firms such as Under Armour continue to have faith in this rough-and-tumble sport. <wwd.com/footwear-news>


-Sally Beauty Holdings Inc. said Friday its Beauty Systems Group LLC subsidiary has acquired Schoeneman Beauty Supply Inc. for $61 million - The acquisition, which will help BSG increase its national presence, particularly in the Northeast, is expected to add slightly to the Denton, Tex.-based company’s earnings per share in 2010. Upon full integration of Schoeneman, the hair products and beauty supplies distributor also anticipates cost synergies to be realized, which will further enhance EPS in 2011. “This acquisition directly supports BSG’s strategy of extending our distribution reach in important geographic regions of the U.S.,” said BSG president John Golliher. “We expect this combination to provide us with a greater opportunity to compete in Pennsylvania, southern New Jersey, Delaware and West Virginia.” <wwd.com/business-news>


-Aldo Group is betting on its retail expertise for a new business called Aldo Retail Services - The division, which last month took on Sixty Group as its first client, includes an a la carte offering of retail-development services, from store operations and merchandising to accounts payable and retail portfolio management. “Any brick-and-mortar retailer in 2009 has to be looking at every way to leverage the investments they’ve made,” said David Bensadoun, Aldo’s group VP for global retail. “We see this primarily as a way to leverage our own expertise to help brands in which retail is not their core business.” Bensadoun said that Sixty Group, which will take advantage of Aldo’s store operations and real estate portfolio management services for the U.S. market, represents Aldo’s target client: “Someone who is already an established brand with good wholesale accounts and a few flagship stores, but who is looking to build a small retail chain of 25 to 100 stores.” While Aldo probably will not work with direct footwear competitors in the contemporary space, Bensadoun said shoe brands in the comfort, kids’ or discount arena would be targets for its retail services division. <wwd.com/footwear-news>


-Again, Coach Inc. has accused Target Corp. of selling unauthorized reproductions of its handbags - In a complaint filed Oct. 1 in U.S. District Court in Manhattan, the New York-based accessories maker alleged Target has sold knockoffs of its Patchwork and Ergo designs. Coach said it spotted the items for sale at the retailer at some time over the summer. “Target is not authorized by Coach to manufacture, distribute, advertise, offer for sale, and/or sell merchandise bearing Ergo Designs or the Signature Patchwork Designs or designs confusingly similar there to,” the brand’s attorneys wrote. Minneapolis-based Target did not return a call Friday seeking comment on the allegations. Coach is seeking an injunction against the items’ further sale, profits from infringing goods sold, attorneys’ fees and unspecified damages. <wwd.com/business-news>


-Perry Ellis International has promoted John Voith to president of sportswear and golf division - The new post will place Voith at the head of the company’s growing golf business and core sportswear brands, which include Cubavera and Axist. Voith joined the company in 2000, and most recently served as executive vice president of the sportswear division. <wwd.com/business-news>


-Retail employment levels remained lean in September as the U.S. economy continued to shed jobs, putting a crimp into hopes for the holiday season - Department stores cut 2,200 jobs in September to employ 1.53 million, after adding jobs in August for the first time since May, the Labor Department said Friday. Specialty stores added 1,600 jobs to employ 1.41 million, but didn’t erase a significant drop in August, when 9,500 specialty store jobs were eliminated. <wwd.com/business-news>


-Burberry increases profit expectations after re-negotiating Japanese apparel license - Burberry said it expects to boost operating profits by $6.4 million in the year ending March 2010 after re-negotiating its Japanese apparel license with two local partners. The company said it had drawn up a new agreement with its current licensees Sanyo Shokai Ltd. and Mitsui & Co. Ltd. The new deal foresees higher royalty payments than previously planned for the 2009-10 fiscal year, and fewer years on the license. Burberry's agreement will now expire in June 2015 rather than 2020. <wwd.com/business-news>


-When it comes to racking up big sales in a tough economy, some savvy kids’ retailers are finding it pays to think small - While powerhouse children’s companies with lots of manufacturing and marketing muscle continue to have an edge, independent retailers are increasingly turning to newer, boutique brands to differentiate themselves in today’s competitive market. According to retailers, smaller brands have a fresh approach to design and, more important, distinct brand messaging. Those strengths are turning indie labels such as Pediped, Morgan & Milo and See Kai Run into bonafide shoe brands. <wwd.com/footwear-news>


-Europe Retail Sales Drop for 15th Month as Unemployment Rises - European retail sales fell for a 15th month in August as rising unemployment curbed consumer spending. Store revenue in the 16-nation euro region declined 2.6 percent from a year earlier after sliding 1.9 percent in July, the European Union’s statistics office in Luxembourg said today. Economists predicted a drop of 2.4 percent, according to the median of 13 forecasts in a Bloomberg News survey. From the prior month, sales fell 0.2 percent. Hennes & Mauritz AB, Europe’s second- biggest clothing retailer, said on Sept. 24 that a sales decline worsened in August with revenue at stores open at least a year dropping 11%. <bloomberg.com>


-IMF Statement about Asian Economies - Even with this good news Asia is facing a key time since unemployment will increase in the coming years while political leaders from the region will have to face up to the challenge of consolidating a new model based on greater internal private demand, stated Singh during a press conference held at the Annual Meeting of the IMF and World Bank. According to IMF forecasts published this week, Asia as a whole will grow by 2.8% this year and by 5.8% in 2010. Asian countries were badly hit during the worst recession in recent years, according to Singh, who stated that Asian exports fell by 30%; there was capital flight and a sharp decline in production. <fashionnetasia.com>


-Wal-Mart Bodegas Lift Profit in Mexican Recession - Wal-Mart de Mexico SAB, Latin America’s largest retailer, is profiting from the worst recession since the 1930s by offering smaller, cheaper products to Mexicans at its Bodega Express shops. Walmex, as the Mexico City-based retailer is known, will report this week a 12 percent increase in third-quarter net income to 3.66 billion pesos ($266 million), according to the average analyst estimate. A rise would mark the fourth straight quarterly advance in earnings. <bloomberg.com>


-Target Reveals Licensed Gift-Giving Ideas - In response to similar initiatives by competitors Wal-Mart and K-Mart and anticipation of the holiday season, Target has revealed highlights for gift givers—many of which include licensed products. The retailer will offer popular licensed toys, including action figures from Transformers, G.I. Joe and Bakugan, as well as Disney Princess sets. Toys for older kids include an electric guitar from Maroon 5 frontman Adam Levine, the Shaun White Snowboarding video game for Wii and Twilight journals. <licensemag.com>


-Patagonia Footwear and Chaco Restructure Marketing Teams - Wolverine World Wide will put additional marketing and product development support in place for both Patagonia Footwear and Chaco. Entering its fourth year at market and with a growing sales force, Patagonia Footwear will strategically restructure its internal team with Jamie Barbor being appointed to director of Patagonia Footwear and will oversee all facets of the Patagonia Footwear business. <sportsonesource.com>


 -USA Football to Award $1 Million in Grants - USA Football, the sport's national governing body on youth and amateur levels, announced that it will award $1 million in equipment grants to youth and high school football programs across America this fall based on merit and need. USA Football's grant program has assisted the youth and high school football community since 2006 and will have distributed more than $2 million through 2009. USA Football is the official youth football development partner of the NFL, its 32 teams and the NFL Players Association. USA Footballs partners include Under Armour and Riddel.



-Wyclef Jean to Design a Line of Boots for Timberland - Wyclef Jean has taken time out of his busy schedule to co-design a line of eco-friendly footwear with Timberland. The collaboration is part of the company’s EarthKeeper program, which will help with the reforestation project in WJ’s homeland of Haiti. Jean will design 16 styles of footwear; the shoes will be constructed out of recyclable and organic materials. <beanstockd.com>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): NKE 


10/02/2009 09:47 AM


Great call by McGough, shorting the euphoria of the moment out the EPS report. Booking the gain here. KM

Acknowledge Reality

“Information is the currency of democracy.”
-Thomas Jefferson
I wonder what Jefferson would think of America’s currency today. I know what the Chinese think – and that’s not good…
I wonder what the Chinese, Brazilians, and Russians think about the G7 meetings today. After all, the G7 club represents the self-proclaimed leaders of the “industrialized” world (UK, France, Germany, Italy, Japan, Canada, and the US)…
I wonder if Washington and Tokyo realize that the old world of view global economic policy has been compromised…
That shot across the bow that the world heard from Rio de Janeiro to Chicago on Friday was real. The G7 that was formed in 1976 is no longer relevant. The world’s balance of global economic and political power is shifting, big time. It’s time for those who fail to acknowledge reality to wake-up and get with the global macro program.
One of the sharper investors I know sent me a note on Friday, expanding upon the point I made about ex-Goldman Partners. I’ll take her word for it in telling me that the number one differentiator that one of Goldman’s finest saw in themselves versus their competition was a “failure to acknowledge reality.” Pretty simple.
Consider the commentary coming out of the G7 meetings from the Top 2 countries in global GDP this morning (USA and Japan):
1.      US Treasury Secretary: “It is very important to the United States that we continue to have a strong dollar”…

2.      Japan’s Finance Minister: “If currencies show some excessive moves in a biased direction, we will take action”…

Now consider the marked-to-market scoring of these comments:
1.      US Dollar reacts in the OPPOSITE direction of Geithner’s intentions, trading down again to $76.86…

2.      The Japanese Yen (versus USD) is little changed at 89.76

There is no need to comb over the specifics of what these two gentlemen intended to say or the impact they hope to achieve. Hope is not an investment process. Neither is listening to compromised and conflicted G7 countries for global currency strategy.
Japan’s ex-finance minister, Nakagawa, was found dead this weekend. The current Minister of Finance, Hiroshisa Fujii, has only been in office for a few months. At 77 years old, I don’t think I am going to be looking for him to evolve his thinking anytime soon either.
As for Timmy Geithner, can someone get the man a 6 month chart? His aforementioned comment about “continuing to have a strong dollar”, remains a failure to acknowledge reality.
We are short Japan via the EWJ etf. We are short the legacy US Equity benchmark index (the Dow) via the DIA etf. We don’t want to be long of political compromise. We don’t want to be long of financial leverage. We want to own liquidity, sobriety, and unlevered growth.
Look at the Dow and Japan’s Nikkei for the YTD:
1.      Closing down -1.8% last week, the Dow Jones Industrial Average is THE worst performing major stock market in the world at +8.1%

2.      Closing down again last night, the Nikkei is the 2nd worst performing major equity index at +9.2% YTD

After sending the Japanese and American Olympic bids home packing on Friday, Brazil’s stock market charged higher, closing up another +1.2%, taking the Bovespa’s 2009 YTD gain to +63%. Brazil’s exports to China are now outrunning their exports to the USA. Japan’s year-over-year export’s for August were down -36% year-over-year!
The world is changing at its most expedited pace in decades. Japan’s equity market is now broken on both my immediate and intermediate term durations (TRADE and TREND), whereas Brazil remains bullish on both. We must respect and acknowledge this New Reality.

My immediate term support/resistance lines for the SP500 are now 1022 and 1040, respectively. US Equities now have the lowest allocation in our Global Asset Allocation Model. We’ll continue to manage risk around our Japanese short position, trading it with a bearish bias.
Best of luck out there today,


EWA – iShares Australia EWA has a 30 day SEC dividend yield of 2.74%.  With Glenn Stevens (our favorite central banker) signaling that policy discipline will take precedence over politics, growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. 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.

USO – US OIL Fund We shorted oil on 9/30. The three Fed Heads just put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.

DIA  – Diamonds Trust 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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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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