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The press release for period 9 sales trends at CKE Restaurants hit at 1am today.  I wonder why?  Here is one clue - Carl’s Jr. sales trends are troubling…….  


BAD NEWS AT CKE - CKE reported P9 sales trends of -3.3% on a consolidated basis.  This includes a decline of 5.5% at Carl’s Jr. and -0.6% at Hardee’s.  Carl’s Jr. saw a 0.4% decline in its 2-years average trends on a sequential basis from period 8.  The company did not make a lot of excuses in its press release other to say that California is struggling and it was sticking with its premium product strategy. 


CALIFORNIA STRUGGLES – The two most recent data points from CPKI and CKE suggest that sales trends in California are not getting any better.  On the margin this is negative for CAKE and PFCB.


TWEEKS IN BOSTON - SBUX said it is withdrawing its Clover Brewed premium coffee offering from seven of its Greater Boston stores as it looks to fine-tune a test program of the Clover system.  Plans call for the seven Clover systems that will be removed from some stores to be redeployed in other Greater Boston stores over the next few months.









Today we are waking up to another round in the “dollar credibility crisis.”  Pressuring the dollar overnight were comments from Federal Reserve Vice Chairman Donald Kohn, who said yesterday the U.S. economy would not snap back quickly from its deep recession, fueling expectations for continued low interest rates for an “extended period” of time.   Extended is, obviously, a duration with no defined end point, so no surprise that the dollar bears are licking their lips this morning


On Tuesday, the S&P 500 closed at 1,073, down 0.3% on the day.  The six day winning streak for the S&P 500 comes to an end on accelerating volume.  The streak came to an end due to (1) a more cautious view on the banks and brokers from Meredith Whitney, (2) the passage of healthcare reform and the pressure in managed care stocks and (3) disappointing earnings from JNJ, DPZ and JCI.


Yesterday’s portfolio activity included buying the Utilities (XLU).  Yesterday, we bought the low beta XLU with a reasonable dividend yield into lower prices associated with the morning's market correction.  We also covered our short in DRI.


The Technology (XLK) sector was the second best performing sector yesterday.  The XLK is the center of M&A activity as CSCO announced its second multi-billion dollar acquisition this month.  CSCO agreed to purchase STAR for $2.9B.  After the close last night INTC reported good numbers and is the primary driver of the early indication of a higher open for the S&P 500.  As Rebecca Runkle noted in her earnings review note last night, INTC has over $14BN in cash on its balance sheet.  Given the high cash levels on balance sheets of technology companies, we should expect sustained and accelerating M&A levels in the technology sector.


In addition to INTC, the other earning report of note is from J.P. Morgan, which printed a monster EPS number, at least versus expectations.  EPS came in at $0.82, which is up dramatically from the year ago quarter of $0.09, and well above consensus estimates of $0.51.  The top line was almost $3BN ahead of expectations as well, primarily driven by fixed income.  The bulls, of course, will probably look past the  fact this morning that J.P. Morgan added almost $2BN to consumer credit reserves, which brings the company wide total to $31.5BN, or 5.3% of total loans.  Loan reserves accelerating is not a good thing, even if irrelevant this morning.


Yesterday, the dollar index was down 0.2% on the day.  In early trading overseas, the dollar index is hitting a 14 month low; trading as low as 75.49.  The dollar fell after Federal Reserve Vice Chairman Donald Kohn said interest rates will remain low for an “extended period” of time. The VIX declined slightly on the day (0.1%) and is now down 10% over the past week. 

Five of the nine sectors in the S&P 500 were up on the day, despite the S&P 500 declining 0.3%.  The three best performing sectors were Materials (XLB), Technology (XLK) and Consumer Discretionary (XLY), 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 (1,053) and TREND is positive (994).   Day 3 of perfection - the Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 9 of 9 sectors are positive from the TRADE duration.         


The Research Edge Quant models have 1.5% upside and 2% downside in the S&P 500.  At the time of writing the S&P 500 is trading +13.00 to fair value; the NASDAQ is trading +22.50 and the Dow Jones is trading +108.00 to fair value.  The futures have been accelerating post the J.P. Morgan earnings report.

Howard Penney
Managing Director


US Strategy – HAWKS VS DOVES - S P500


US Strategy – HAWKS VS DOVES - s pperf

US Strategy – HAWKS VS DOVES - s plevels

A Perfect Day!

“When you realize how perfect everything is you will tilt your head back and laugh at the sky.”
After veteran Fed Head, Donald Kohn, pandered to the most politicized policy making stance in US economic history last night, what is there not to like about anything priced in Burning Bucks? This is perfect! Isn’t it?
The Credibility of the US Currency has been blown right out of the water, and now the Buck is Burning to lower-lows. This morning’s early trading sees the lowest price we’ve seen in 14 months for the US Dollar Index, trading down another -0.63% at $75.50. Importantly, the only prices that were lower than this for the US Dollar (since 1971 when the USD became the world’s “Reserve Currency”) was that which we saw right before the 2008 US stock market crash.
This is perfect!  Right? Go, Go, Jaime D-iego Earnings, GO!
In the immediate term, of course, it is! Never mind about the intermediate term or long term implications. Let’s jack this Dow Jones party up to 10,000 feet and start paying out them Wall Street bonuses again baby! If your neighbor says anything about it, just “tilt your head back, and laugh at the sky!”
The #1 headline on Bloomberg this morning is: “Stocks, Oil Climb on China Exports; Dollar Drops, Gold Gains.” Doesn’t this sound like a perfect environment for the Fed Heads to fear-monger you into thinking about Bernanke’s Great Depression text books? The Vice Chairman of the Fed (Kohn), who has never seen an asset price bubble that he understood, has a view that the chance of accelerating prices isn’t something we need to worry about “for awhile.”

What Almighty Incompetent One is “awhile”? Oh, right - the Fed doesn’t do specific durations. That’s perfect too! Now we can really jack this party’s volume up. Let’s ignore the accelerating prices that are marked-to-market though, and take Geithner’s Aides word for it. They are paid to be willfully blind. They’ll never know how loud we actually have this bullish Dollar debasement volume dialed up to anyway!
Perfect is as perfect does. Sounds like October of 2007… unfortunately…
For now, look at these bullish country level stock market prices accelerating which, ostensibly, the compromised and conflicted get paid to ignore.  Just “tilt your head back and laugh” some more:
1.      SP500 futures 1082 = that’s only +60% higher than said Great Depression Part Deux in March

2.      China closed up another +1.2% to +63% YTD, after reporting a sequential ramp in exports of 700 basis months month-over month!

3.      Hong Kong and Australia tacked on +1-2% moves overnight, taking both markets to higher-highs at +52% and +32% YTD, respectively

4.      Germany is leading Western European stock markets to new YTD highs, trading +1.8% so far this morning to +21% YTD

5.      Russia adds another +3.4% to its YTD deflation of +129%! Oops, I mean reflation – or Mr. Kohn is that an acceleration?

6.      Brazil’s Bovespa closed up at a fresh YTD high yesterday of +72%; accelerating prices anyone?

With that Buck Burning, don’t be bringing up the Commodity side of year-over-year price accelerations now either. That’s not going to be perfect for our newfound narrative of PERFECT! Shhhh… talk about rents or housing or something would ya…
Instead of seeing that oil moving from $35/barrel in Q4 of 2008 to $75/barrel this morning, or that the price of Gold or, God forbid, TIPS (Treasury Inflation Protected Securities), let’s let this Buck Burn at the stake. This is perfect for Debtors, Bankers, and Politicians. Never mind the citizenry… they don’t really watch this American Financial Wizard of Oz show on YouTube do they?
Yes, fortunately, they do. In face of the US stock market making higher-highs and the US Dollar making lower-lows, this week’s reading on American Consumer Confidence (ABC/Washington Post weekly data) dropped a full 3 points to minus -48 (down from -45). Maybe not so perfect for everyone after all…
Of course this isn’t perfect for everyone. In the long run, our long standing position as the world’s financial reserve fiduciary will be dead. In the meantime, them Intel and JP Morgan earnings really look perfect though don’t they! Give me a big CNBC Booooyah!
I have a higher-high of immediate term TRADE resistance now for the SP500 at 1090. Immediate term support remains at 1053. Our Macro Team will be holding our Q4 Research Edge Macro Themes conference call this afternoon. If you’d like information about the call, please email .
Best of luck out there on this perfect day for America!

XLU – SPDR Utilities
We bought low beta Utilities with a reasonable dividend yield on 10/13.

EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

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.

XHB – SPDR Homebuilders
We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

USO – US OIL Fund WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

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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Las Vegas Sands will launch the initial public offering of its Macau business late next month.   The company is seeking to raise up to US$2.5 billion in the offering.  The SCMP cites “sources familiar with Sands’ plan” as saying that the operator expects to complete the offering in about four weeks after receiving regulatory approval for a share offering and listing on the Hong Kong stock exchange.


Once regulatory approval is obtained, LVS’ bankers can begin to market the share sale to potential investors.  The bankers believe that Wynn’s recent IPO success in Hong Kong has presented “a good platform for the listing”, according to sources cited by the SCMP.  The IPO comes after the restructuring of US$3.3 billion in Macau-specific debt in exchange for higher interest payments and the raising of US$600 million in pre-flotation bond sales that could convert into shares in the Macau unit following a stock market listing in Hong Kong.           





Edmund Ho Hau-wah seems to be making a final push to act on previous pledges to control development in Macau’s gaming market.  Secretary for Economy and Finance Francis Tam Pak-yuen said on Monday that the administration of the outgoing chief executive is planning to review the number of table games in operation. In addition, it plans to raise the age limit for players and dealers to 21 from 18 and relocate machine parlors away from residential areas. 


All of these measures have been previously announced by the current administration but none has been carried out.  It seems that much of the renewed interest is due to “prodding from Beijing” to do something to rein in growth before the new government comes in.  Given that the current administration only has two months left in office, there is little time to bring measures before the new legislature which will be sitting its first session on Friday. 





Information from the Statistics and Census Service indicated that visitor arrivals in package tours increased in August by 3.7% y-o-y, putting an end to continuous y-o-y decline for the past three months.  The average hotel occupancy rate in Macau rose to 80.4%, or by 3.7% compared to the same period in 2008.  August saw a total of 631,454 guests check into hotels and guest houses in Macau, up by 15% y-o-y, with the majority coming from Mainland China (47.6% of total) and Hong Kong (27.9%). 

Game of Chicken: SP500 Levels, Refreshed...

When I was a kid, I used to play this game of chicken. Today, with the Dollar testing its YTD lows, it feels like the SP500 is playing the same…


The USD Index is down -0.29% at $75.90. The 2009 YTD low is 13 cents away from that print. Can the Burning Buck mark a lower-low as the SP500 tries its best to climb above its YTD closing high? That’s the game of chicken that the REFLATON trade wants to play.


In October of 2007 I wasn’t brave enough to stay in it on the long side until the bitter end. Thank God for that. Today, the risk management setup is far from similar, but it is October, and them chilly mornings can wake you up like they did with selloffs like we saw today.


I have only bought and covered positions today (bought Utilities (XLU); covered Darden (DRI). Since my 1054 line held, however low beta my buys may be, I’m definitely a better buyer on today’s weakness. Until this Buck stops Burning, the math will force us to play this US government sponsored game of chicken…


Today’s intraday US stock market recovery puts my refreshed TRADE lines of immediate term support/resistance at 1054 (dotted green) and 1089 (dotted red). In the Virtual Portfolio I now have 20 longs and 9 shorts.



Keith R. McCullough
Chief Executive Officer


Game of Chicken: SP500 Levels, Refreshed...  - chart1013



In light of recent RevPAR trends and MAR's 3Q09 results, 2009 guidance looks too conservative. We still think Street estimates for 2010 need to come down.



We expect HST to beat the Street numbers and raise 2009 guidance when they report this Wednesday.  Our Q3 Adjusted EBITDA estimate of $140MM is approximately 6% above the Street.  For Q4, we are 8% above the Street's estimate of $233MM.  We think 2009 RevPAR will come in closer to 19.5% than the down 20-23% guidance from the 2Q09 earnings call.  If RevPAR comes in better than company guidance, operating margin compression should also be less severe than the guidance of down 600-650bps. 


Despite our belief that HST will beat and raise for 2009, we are still cautious on the stock and the lodging space.  HST is trading at almost 15x 2009E EBITDA and about 18x 2010E EBITDA - hardly attractive in our opinion.  The implied price per key of 189k is also not particularly "cheap", in our opinion.  Lastly, we are still below the Street on 2010 for both revenues and EBITDA. We believe 2010 will bring positive occupancy but will still have negative ADR as the industry seeks to recover the roughly 10 points of occupancy lost from peak to trough.  Until occupancy recovers meaningfully, we do not believe that hotels will have much pricing power.  In the meantime, costs should modestly rise, resulting in operating margin declines.


2010 Guidance?

Last year HST did not provide 2009 guidance on the third quarter release, so we do not expect them to address 2010 in the release since visibility hasn't markedly improved. However we do expect HST to give preliminary guidance related to 2010 on the call which we suspect will be highly predicted on GDP recovery.



3Q09 Preview Details:

RevPAR of -19.5% on NA hotels

  • Using a weighted average of HST's US city exposure for 6/20-9/5, we came up with a RevPAR estimate of -16.4%, which we adjusted downward given HST's exposure to Upper Upscale and corporate travel
    • This compares to Marriott branded NA operated RevPAR being down 19.8%
    • Estimate -7.5% occupancy and -13% ADR
  • F&B down 18% and other down 4%

Cost per Occupied room down 2% ; total property level expenses down 10%


FFO of $0.09



"Youtube" from 2Q09:

  • "The weakness in rate is not likely to abate until demand recovers, which will likely require the economy to stop shrinking and start expanding.  However, we have seen some progress in slowing the negative trends we experienced since the beginning of the year.  While the group cancellation rate for the quarter was still above our normal average, it represented less than half the rate we experienced in Q4 of 2008 and the first quarter of 2009."
  • "cancellation rate improved meaningfully through the quarter, suggesting this issue may present less of a problem going forward"
  • "We think the margins will decline more than we experienced in the first half of the year, as the RevPAR decline will be more weighted to declines in average rate and changes in the business mix, as well as lower food and beverage margins due to further declines in high profit banquet and audio-visual business"
  • "We expect an increase in hourly wage rates and in property insurance costs, as insurance rates have started to increase.
  • "if you look at the RevPAR range that we've suggested for the full year it tends suggests that the second half of the year somewhere between 17% and 20% decline in RevPAR. 

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