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Volatility (VIX) climbing, and concerning

The VIX has shot up another +8.4% so far this morning, to 22.92. Bearishness is morphing its way into consensus, but until I see VIX readings of at least 30-32, I'll argue we have not seeing the required capitulation washeout.

Wall Street (NYC) Employment Chart...

My Partner, Brian McGough, posted this chart the other day. Is this picture likely to change any time soon?

Jobless Stagflation ...

The weekly jobless number of 384,000 confirms the real time "Trend" that is developing right now and that's quite simply that unemployment in the US is no longer going down, its going up. This is not good for growth, and adds to my conviction in the "stag" part of the stagflation thesis.

The 4 week moving average of claims now stands at 378,000, and this is the highest reading of the year. Within the framework of my US Consumer is "RIPTE" model (Regulation, Inflation, Protectionism, Taxes, and Employment), this trend in US employment is going to amplify the political pressures implied within the rest of the oncoming RIPTE consumer spending winds.


(picture: http://www.chaosbydesign.com/desktops/art/jobless.jpg)

NKE: The Big Decoupling?

Nike's superb outperformance relative to nearly all other consumer stocks over the past year has been bound, in part, by the fact that the sell-side, long-only, and hedge fund worlds have been on the same page. 4Q's quality of earnings is likely to change that.

Let's face it. Nike's 4Q was definitely not what a $66 stock expected. I know this thing like the back of my hand and even I was surprised by the numbers. Yes, NKE beat by a penny, but in my mind, anything less than 5% upside is not a legitimate beat with Nike. Sales and GM% were both very solid, but to increase gross profit by 22% and post flat operating profit growth is a sharp reversal from the characteristics that have made this stock such a solid near-term hiding place. SG&A was obviously the big culprit due to Olympic and European Championship spending, but it will be impossible for anyone to miss that this was the biggest quarterly boost in spending since 1998. Nike got plenty of help on the tax rate, which accounted for about a dime relative to my number. The good news is that this is ongoing, but it does little to offset the 'quality of earnings' issue. The balance sheet looked good with the cash cycle improving by about 4 days vs. last year, but at a decelerating rate from what we've seen in prior quarters.

Net/net: My model still gets me to north of $4 in EPS for FY09 - which is likely 5-7% ahead of where the Street is likely to shake out. Even if the stock opens unchanged (which it won't) we're looking at 16x earnings and 9.3x EBITDA. Not ridiculously expensive, but not cheap either. This is when I turn to my Partner Keith McCullough for his take on where the stock is headed from a quantitative standpoint. His response sounded something like 'this stock is a buck away from breaking down - watch it like a hawk in the next few days.' I'll be doing just that.

No changes to my view on the long-term model - and even the near-term operating model for that matter. But with US futures flat, US EBIT down, Europe slowing on the margin, trepidation about 'what's next' in Asia after the Olympics, and pressure on the margin front for the industry, it's going to be tough to argue that we're not in one of those uncomfortable periods where volatility in this 'safety stock' picks up in a very meaningful way as views of the major constituents on Wall Street decouple.

I'm firm in my view that Nike will beat next year (based on many factors). We get sales growth and GM growth in 1H, and in 2H we get extremely easy SG&A compares to the extent that the top line weakens. If the stock does, in fact, break down, then later this summer it's a solid story to revisit vis/vis EPS beat and longer-term global growth.

CMG - Chipotle giving away Food??

Here's a free burrito to ease your gas pain [The Columbus Dispatch, Ohio]

Wednesday, June 25, 2008 4:41 PM

Jun. 25--Can a car run on beans and rice? Chipotle Mexican Grill thinks so -- sort of.

In an effort to offset the high cost of gasoline, the Mexican restaurant chain is offering customers free burritos, tacos or bowls from 5 to 8 p.m. today at Columbus-area stores -- one per person, no fax orders accepted. The company said it wants customers to be able to spend the money they'd usually spend on dinner on gasoline instead.

Discounting is never a good sign!


I like cash flow, especially if it's free. Buying the regional gaming operators at a forward free cash flow yield over 15% has historically generated outsized returns. I understand that FCF yield is a function of price so the two often move in opposite directions. However, even buying in at the beginning of the valuation cycle rarely has lead to significant losses. By my calculations, the regional gaming operators (ASCA, BYD, ISLE, PNK) are trading at an average forward free cash flow yield of 18%, very attractive indeed, especially in light of the historical precedent. The last time yields crossed the 15% threshold was the 9 month period from December 2002 to August 2003. This turned out to be a very opportune time to invest in the regional stocks. Buying the index at the average price during this period would've yielded a 125% return over the next 9 months. Even if one bought at the peak, the return would've still been 100%. Looking back even further to the elongated period of high free cash flow yields 8/98-7/2001, buying in at almost any point would've generate positive returns over the subsequent 12-18 month period. Can money be made in the current FCF cycle? Only time will tell but history and valuation support the long view. We've got our eye on PNK.

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