If you’ve been following our work you’d know that we’ve had a bearish bias on the UK for the balance of the year. The Producer Price Index numbers for September released today by the Office for National Statistics support our thesis that inflation will outpace growth in the UK, adding to the cocktail of negative headwinds for the island nation.


Annual output price (factory gate) for all manufactured products rose 0.4% in September or +0.5% month-over-month, while annual input prices fell 6.5% compared with a decline of 7.7% in August on a year-over-year basis. In short, producers are still benefiting from lower energy (input) costs on annual compares, but sequentially energy, transport, and food costs are inflating --gaining 2.0%, 0.6%, and 0.3% respectively for the month.


Core PPI, or Manufactured Products other than food, beverages, petroleum and tobacco, rose 1.4% year-over-year driven by a 4.4% rise in motor vehicles and other transport equipment and 3.8% rise in machinery and equipment.


With CPI at 1.6% in August Y/Y --and even with initial forecasts for a decline in inflation to 1.3% when September’s reading is released on October 13th, we’re of the camp that inflation is returning to the UK, an unhappy development  for producers and consumers coming out of a recessed economy.  Remember that Q2 GDP read positive for Germany and France at +0.3% Q/Q, but much of Europe saw contraction, including in the UK at -0.6% Q/Q.  From an inflationary standpoint, we continue to like Germany (EWG) at -0.2% to -0.3% (also the Eurozone average), a level we believe will not profoundly impact consumer demand as long as it remains offset by growth.


Returning to the UK, with both the BOE and ECB sitting on their hands during their latest policy sessions this week and keeping interest rates unchanged at 0.5% and 1.0% respectively, we view the BOE in a tenuous and unfavorable position for the intermediate term.  On one hand, the Pound has significantly depreciated against the USD and EUR, down 4.7% versus the USD and 7.9% versus the Euro since Aug. 1; clearly the Pound’s fall has eroded purchasing power for a country heavily dependent on imports. On the other hand, while raising interest rates may clearly be needed to dampen inflation, it could also stymie growth. 


As we see the tidal shift of Central Banks moving towards raising rates in a post deflationary environment, we’ll have a close eye on BOE and ECB monetary rhetoric and action. Due to the structural nature of the UK economy, we continue to expect underperformance from the FTSE versus its European peers and the S&P500.



Matthew Hedrick





A bizarre move on the part of BKC…..


On September 17, Burger King confirmed that Russ Klein, Burger King Corp.’s president of global marketing had taken a personal leave of absence.  The company quickly replaced him with Mike Kappit, senior vice president of business intelligence. 


John Chidsey, Burger King’s chief executive, notified franchisees of the news in an e-mail, in which he wished Klein “a speedy return.”


Apparently, he does but why?


On 4/20/09, I noted that from an advertising standpoint, Burger King had recently made two critical missteps with its edgy advertising tactics.


A month later Business Week ran a story on BKC titled "Burger King's Big Misstep" that  stated that CEO John Chidsey wrested control of marketing from his franchisees; now he's losing business to McDonald's.  Russ Klien was at the helm when the problems started.


In the BKC proxy filed two days ago, the company disclosed that in late August, they granted a “special equity award” to the Global Marketing Officer valued at $2.25 million as a “retention tool”.


It seems a little bizarre that the guy who was in charge of global marketing for Burger King at the time there were “marketing missteps” was offered a big “retention bonus” and takes a sudden leave of absence.




Who says that September is a seasonally slow month?  57% y-o-y revenue growth suggests otherwise.


The hot streak we saw in August continued throughout the month of September.  September revenues were up 57% with VIP revenues leading the charge with 71% y-o-y growth, Mass grew 27% and slot revenue increased 24%.  A pick up in the growth rate is no surprise since September 2008 was the first easy comp where y-o-y growth turned negative.  The easy comps will continue through June 2010.


September is typically a seasonally slow month for many reasons including back-to-school season and junkets and players saving dry powder for Golden Week. However, it seems that this September didn't experience that seasonal slowdown due to a number of factors including easy comps, looser visa restrictions, stock market rally, new supply additions, and stimulas pumped into the chinese economy.  While still early in the month, indications in the press suggest that the strength we saw over the last two months is continuing in October.


The rising tide lifted all ships in September, however MELCO and SJM seemed to be the greatest beneficiaries of this hot month. See below for details on y-o-y performance and market share changes.


Y-o-Y Property Observations:


LVS table revenues up 8%

  • Sands was up 10%; with 13% growth in VIP win and 5% growth in Mass
    • VIP RC decreased at Sands (~28%),  however hold comparisons were very favorable
  • Venetian was up 6%; all the growth came from Mass which was up 15%
    • VIP RC (Rolling Chip) was up 12% but hold was down
  • Four Seasons was down sequentially from August but still more than doubled revenues from last year to $28MM


Wynn table revenues were up 16%

  • Mass was down 9%, offset by a 23% increase in VIP


Crown table revenue grew a whopping 244%, with both properties exhibiting strong results

  • Altira was up 39%, however September 2008 was a very easy comp given the sub 2% hold 
    • Hold was below normal at Altira, around 2.6%
  • CoD continued to ramp with total revenues growing 32% sequentially to an estimated total of over $145MM
    • Unfortunetly Mass ramp continued to be slow, we estimate $18MM 
    • VIP RC grew 5% sequentially, despite September being a seasonally weak month
    • September was another good hold month for the property


SJM continued its winning streak, with table revenues up 87%

  • Mass was up 40% and VIP was up 125% 
    • L'Arc opened September 21rst with roughly 100 Mass and 50 VIP table
    • SJM revenues should continue to stay strong with the addition of Oceanus in either Dec or early Jan


Galaxy table revenue was up 57%, mostly driven by a 70% increase in VIP win

  • Starworld continued to perform well with table revenue up 74%, soley driven by 92% increase in VIP revenues


MGM table revenue was up 42%

  • Mass revenues grew 30%, while VIP grew 47%
  • Sequentially results were 34% lower than July & August, partly due to sequentially lower hold (which was still materially better than what MGM held in Sept 2008)



Market Share:


LVS' share decreased to 20% from 24% in August

  • Sands' share increased to 8% from 7% in July
  • Venetian & FS' share decreased to 11.3% to its lowest share month since March 08 from 17.1% in August
    • However, all the share loss was in lower margin VIP which plunged from 16.5% to 8.9% sequentially
    • Mass share was flat m-o-m at 18.5%


WYNN's share increased to 13.8% from the low's of 12.6% in August


Crown's market share was 17.5%, up from 16.2% in August


SJM's share increased for the second month in a row to 31.5% from 26.4% in August


Galaxy's share eeked back to where it was in July to 10.6% from 10.1% in August


MGM's share decreased to 7% from 10.5% in the prior month


AN INDIAN SUMMER IN MACAU - Macau Total Bac Marketshare sept



AN INDIAN SUMMER IN MACAU - Macau Mass Market Rev Share sept



AN INDIAN SUMMER IN MACAU - macau rc turnover share sept




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Surprising Strength: SP500 Levels, Refreshed...

The US Dollar opened at its highs, and has proceeded to back off those highs. As a result, after opening weak, US Equities have since strengthened.


For short sellers of the REFLATION trade, this has been frustrating, but respect and understand that there are still a lot of funds chasing performance into mutual fund year end AND that mathematical correlations aren’t 100%, particularly on shorter durations.


High R-Squares of inverse correlations (like SPX vs USD) are never perpetual. The #1 risk to my current market view is that, as the Burning Buck becomes consensus, that this dominating 2009 inverse correlation starts to unwind. In the long run, I think raising rates is bullish for America’s balance sheet. And don’t forget that after the Australians raised rates earlier this week, their stock market went straight UP!


For now, the risk management setup is as follows:


1.       Immediate term TRADE resistance (dotted red line) = 1080

2.       Immediate term TRADE support (dotted green line) = 1047


A close above 1071 (the YTD high) would be very bullish for price momentum. A close below 1047 puts this market’s bullish TREND line of support in play. That line, however, is a lot lower, down at 990 (see chart below).



Keith R. McCullough
Chief Executive Officer


Surprising Strength: SP500 Levels, Refreshed...  - a1


US Strategy: Dollar Rhetoric



Yesterday, the S&P 500 closed at 1,065, up 0.7% on the day.  Day four of the S&P 500’s rally as the momentum behind the recovery trade continued into Thursday.  Also, earnings season got off to a solid start with AA, RT, and MAR and PEP all reporting better-than-expected results on the bottom line, while domestic demand trends are still an issue.


In addition, September same-store sales came in ahead of elevated expectations, rising for the first time in over a year; a number of companies in the retail space also raised EPS guidance. 


Four of the six best performing stocks in the Consumer Discretionary (XLY) were Household Durable names, with the LEN and DHI the top two.  The homebuilders were up on speculation that expectations that the first-time homebuyer's tax credit would be extended for another 6 months. 


The market also benefited from a larger than expected drop in initial claims.  Yesterday, initial claims fell 33,000 to 521,000 in the week-ended Oct 3rd; below consensus expectations of 540,000.  The four-week moving average fell to 540,000 from 549,000, the lowest level since January 2009.


Yesterday’s portfolio activity included buying EWT – Taiwan Index.  Coming in yesterday, Taiwan was down -1.4% over night, and I have been waiting here for a down day to buy into ahead of the Chinese stock market opening again.


The dollar index fell 0.7% to its lowest level since August 2008. Support for our “bombed out buck” is coming from all around the world today.  In particular key Asian central banks intervened heavily in the currency markets yesterday on fears that the appreciation of their currencies against the US dollar means that their exports could be losing ground against China. 


The VIX declined for the fourth straight day and is now down 15.7% over the past week. 

Yesterday four of the nine sectors outperformed the S&P 500, with every sector positive except utilities, which was flat on the day.  The three best performing sectors were Materials (XLB), Energy (XLE) and Industrials (XLI), while Utilities (XLU), Healthcare (XLV) and Financials (XLF) were the bottom three.  We are currently long the XLV. 


Today, the set up for the S&P 500 is: TRADE (1,050) and TREND is positive (988).   The Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 8 of 9 sectors are positive from the TRADE duration.  The only sector not positive on TRADE is the Utilities.        



Howard Penney
Managing Director


US Strategy: Dollar Rhetoric  - S P500


US Strategy: Dollar Rhetoric  - s pperf


US Strategy: Dollar Rhetoric  - s plevels



The Wendy’s turnaround story will not be complete until it can find ad advertising message that resonates with the consumer.


Today WEN is launching its biggest ad campaign in years with a focus on product quality and a new bacon cheeseburger meant to take on competitors’ premium burgers.  The tag line for the campaign is "You Know When It's Real" as it attempts to emphasize fresh ingredients and in-store preparation.


Thinking back to the initial success of the McDonald’s “I’m lovin it” slogan and Burger King’s rejuvenation of “The KING,” both advertising campaigns were critical in successfully driving incremental customers.  To date, Wendy’s has not benefited from the money it is spending on advertising and marketing.  For reference, Wendy's spent $305 million on ad time and space in the U.S. last year while McDonald's spent $820 million, according to TNS Media Intelligence.


Yesterday’s move in RT was interesting – the upgrade helped – but it’s over done.  For RT, the biggest red flag continues to be food costs.  Even with better reported sales than I was modeling for the quarter, food costs as % of sales were up nearly 300 bps with favorable YOY commodity costs!


RT’s company same-store sales were surprisingly good relative to the industry.  RT’s outperformance relative to Knapp Track grew to 4 points in Q1 versus 2.4% in 4Q09 (though softer prior year comparisons account for some of this outperformance).  RT’s traffic outperformance grew to 9-10% during the first quarter from 8-9% in Q4 so the company’s average check continues to be under increased pressure. 


Management addressed the issue of its lower average check and stated that it is focused on increasing its average check to the $12.50 to $14.50 range from its current mid-$11 range with some benefit expected as early as the second half of fiscal 2010.  Specifically, management thinks it will have some ability to take price in 2H.  The company is relying on this menu price increase combined with new products, changing menu mix with more appetizers and dinner items (dinner entrees have moved to 45% of sales from 25% last year) and reducing incentives as the company overlaps promotional efforts from January to help boost check going forward.  I was surprised by RT’s sales performance this quarter so the company could continue to surprise me but taking price in this environment without hurting traffic will prove difficult.  To that end, management stated on its earnings call, “I think what's most important is we want to drive traffic, it's most important to us right now and we will continue to drive positive traffic at whatever cost that represents.”  So despite the focus on average check, getting people in the restaurant continues to be the company’s primary focus.


Franchise same-store sales growth was weak in the quarter while SG&A was a little lower than I was modeling.  Contributing to the decline in SG&A were reduced advertising costs as marketing dollars were shifted from television to promotion and lower supervisory labor as RT increased the span of control for both regional and area supervisors.  RT increased its span of control about 6-9 months ago so the associated decline in SG&A was nothing new, but this type of cost savings initiative is concerning in the long-term as it often impacts the customer experience.







This habit is hard to kick!



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