MSSR reported 3Q09 earnings after the close yesterday and same-store sales trends continue to be ugly.  Management seems to take some comfort in the fact that traffic trends improved sequentially from Q2, but with traffic still down 14.2% in the quarter relative to -16.7% in Q2, there is little to get excited about.  And, same-store sales growth actually got worse, -18.8% (from -17.3% in Q2) as increased value initiatives put pressure on average check, which was down 4.6% in the quarter relative to -0.6% in Q2. 


MSSR did join the list of restaurant companies that experienced less bad trends in October.  In response to a question, management stated, “Yes, actually we saw some deterioration month-over-month in the third quarter, July, August, September, which resulted in the 18.8% on the comp sales side.  But what we've actually seen in October is an improvement.  We're going to be at 13.9% on a comp basis – sales comp basis for P10.  More importantly, as we've said, we've seen some improvement in the overall traffic.  We're at a 10.4% year-over-year comp on traffic for October.”


In this challenging environment, most restaurant operators are talking about value and increased promotional strategies to drive traffic.  At the same time, management teams do their best to assure investors (and themselves) that they are approaching value in a way that will not be detrimental to their concepts’ long-term brand image.  This does not seem to be the case at McCormick and Schmick’s. 


Though not a newly announced change in strategy yesterday; management is not being promotional as much as deliberately acting to change the brand. Management even used the term “rebranding” in reference to its latest efforts to increase frequency at its bars and is attempting to broaden its target audience.  Management stated yesterday on its earnings call, “Over the past couple of quarters, I have outlined a broad strategy to evolve our concept with the primary goals of broadening our connection to a younger audience, increasing our brand relevance and improving our overall satisfaction ratings with our guests. This strategy involves rebranding our bar experience, expanding our culinary offerings and synergizing our marketing efforts. I am pleased to say we made good progress in all of these areas in the third quarter.”


Management is in the process of upgrading its audio-visual package to drive additional traffic during key sporting events and is offering significantly lower prices points on its menu such as 10 items under $10 at lunch.  These initiatives may help traffic in the near-term, but they seem to highlight a fundamental change in brand image.  With the 10 items under $10 lunch program already accounting for 34% of McCormick and Schmick’s lunch entrees, the value band offerings representing 8.4% of entree sales and the new $19.95 positioning on the culinary side running at about 11% of entree sales, it may be difficult to remove these offerings when economic conditions improve as they now make up a sizeable portion of sales.


These new offerings are in line with management’s communicated strategy “to broaden its guest space.” I just wonder if, over time, these initiatives will lead the concept into the casual dining “sea of sameness,” which as we have seen is not a much better segment to be in right now.





November 5, 2009





Coming out of last month where expectations were high and the results actually delivered even further upside, it was natural for an aura of bullishness to transcend the retail sector.  Adding more fuel to the fire was the substantial easing of comparisons as October began and a nice cold weather burst to spark the sales of seasonal merchandise.  As the month progressed, several companies began to report earnings and unanimously added positive commentary about the trends in October.  The culmination of this bullish wave came when a handful of retailers including TJX and JCG raised earnings expectations mid-month on the strength of sales and margins.  So, why the chronological recap?  Simply put, expectations finally got out of hand.  That is not to say the underlying trajectory for most companies is still gradually improving and there are an increasing amount of retailers now reporting positive same store sales in the absolute sense.  However, if we’re judging on relative performance, today looks more “normal” than it has in a little while.  There were winners and losers and upside and downside, which means we’re back to the reality of retailing as we enter what is now the most crucial time of the year.

  • Upside with positive earnings revisions: TJX, PLCE, SSI, ROST, HOTT, GPS
  • Upside to sales expectations: ANF, WTSLA, BONT, M, COST, JWN, SKS
  • Downside to sales (upside to earnings): ARO, AEO, JCP, CATO, KSS
  • Downside(essentially in line): TGT, FRED, ZUMZ, LTD, BJ, DDS








Some Notable Call Outs


  • It was only a short time ago when department stores started to move their merchandise up-market and as a result, we saw brands like Chaps secure their sweet spot in the middle-market with retailers like Kohl’s. Fast forward to 2009 and it appears that some of these trends and strategic merchandising moves are being unwound. On Warnaco’s 3Q conference call, management indicated that its Chaps line will now be carried in 300 additional doors across Bon-Ton and Carsons. The change is attributed to the consumer demanding more moderate priced apparel. Overall, this is a big win for Warnaco and Kohl’s (some may see this as increased competition while I see it as brand validation).


  • Despite conflicting reports in the liquidation channel as to the availability of goods for purchase as we head into the holiday season, Big Five Sporting Goods suggested that the environment for opportunistic buys in its product categories remains favorable. The company has already taken advantage of some great “value” driven opportunities and expects to remain flexible in its ability to procure further merchandise depending on the cadence of holiday sales. As it stands now, same store sales have accelerated post 3Q and are tracking up at a low single digit rate.


  • With 50% of Lucky Brand’s merchandise now priced at $99 or less, the brand’s major change in pricing strategy (lowering AUR’s) appears to be taking hold. After making major changes in pricing and the merchandise assortment, September same store sales posted a 26% decline. Just one month later, unit sales have picked up helping to drive October to a positive 1% comp. This is one of the more pronounced examples we’ve seen lately demonstrating price elasticity, especially in the denim arena.





 -U.S., EU Seek Trade Probe of China Raw-Material Curbs - The U.S. and the European Union asked the World Trade Organization to probe Chinese taxes on exports of raw materials used in the metals and chemical industries, escalating a third joint complaint against China. The duties discourage the export of commodities including coke, bauxite and manganese that are “critical” for U.S. and European manufacturers, while keeping them cheaper and available in China, the U.S. and the EU said yesterday.

Trade tensions with China have grown after the worst economic crisis since the Great Depression crushed global exports, leading the WTO to forecast a 10 percent drop in goods trade this year. Pascal Lamy, the WTO’s director general, said on Nov. 3 that the threat of protectionism may linger for another two years as countries attempt to protect jobs in domestic industries. <>


-Cabela's Sells Wild Wings - Cabela's Inc. announced the sale of its wildlife-art division, Wild Wings, LLC, to RDE Acquisition Company, LLC, which is owned by a former executive officer of Wild Wings. The closing of the sale took place on Oct. 30, 2009. Terms were not disclosed. As one of the leading publishers, distributors and retailers of wildlife, sporting and nostalgic Americana art prints and art-related products, Wild Wings represents more than 50 of North America’s top wildlife artists and Americana/nostalgia artists. Wild Wings reproduces original wildlife and nature artworks, sells such works as limited-edition prints and sells other collectibles through retail stores, the Internet and mail-order catalogs. <>


-September Outdoor Sales Down; Strong Equipment Sales at Specialty - Retail sales for all core outdoor stores combined (chain, internet, specialty)* declined 4% compared to last September, moving from $350M to $336M, according to the most recent edition of the Outdoor Industry Association (OIA) Outdoor Topline Report. Select equipment, accessory, outerwear and footwear categories continued their positive momentum in September. Year-to-date sales (January – September 2009) totaled $3.2B, down 5% from the same period a year ago. Labor Day fell on September 7th this year. That later date pushed the entire Labor Day Weekend, and the associated retail sales, into the month of September. The traditional Labor Day Weekend sales boost was captured in September’s Point of Sale data, not August’s as it was in 2008. Combined, August and September sales totaled $661M, a 5% decline from the same two-month period a year ago. All three channels saw slight declines for the combined August/September period. <>


-China boosts East Asian growth - The World Bank has upped its 2009 growth forecast for China from 7.2% to 8.4%, but says the nation needs to encourage more consumer spending. Consumer spending has remained high in China (around 15+ per year) since the world financial crisis began maintaining demand for western consumer products, vehicles, fashion items and luxury goods such as champagne. The Washington-based body also raised its projection of 2009 GDP growth in East Asia as a whole to 6.7% from 5.3%, thanks to China's strong growth. The World Bank also said that China, boosted by a recent stimulus plan, must move away from an industry and investment-based economy. "The economic rebound in East Asia and the Pacific has been surprisingly swift and very welcome, but take China out of the equation and the regional picture is less rosy," the bank said in a report.

"The rebound has yet to become a recovery." <>


-Kohl’s unveils its online strategy for the holiday season - Kohl’s Corp. is charting an aggressive course for its holiday season marketing strategy in an effort to reach cost-conscious shoppers. The company says it anticipates online sales during the holidays will grow by 30%. The company is planning to update its Facebook page—which has 700,000 fans—with holiday campaign offers and add a new function to its e-mail promotions that enables recipients to post sales offers to their Facebook pages. <>


-Nordstrom launches international web shopping in 30 countries - Nordstrom Inc. today announced that its online customers inside and outside the U.S. can pay in 12 different currencies and that the online store will ship to 30 countries. “We are excited about this opportunity to better serve our customers internationally,” says Jamie Nordstrom, president of Nordstrom Direct. “We’ve made it a lot easier for our customers abroad to shop from Sending great fashion merchandise from Nordstrom to friends and family overseas is also more convenient than ever for our domestic customers. <>


-Escada sells Primera brands - Escada, the German womenswear brand, has sold its Primera division to German private equity firm Endurance Capital. Primera comprises brands Laurèl, Apriori and Cavita. Luxury German womenswear house Escada previously signed a contract to sell the three brands to investment fund Mutares AG in May but withdrew from it on Friday, citing problems with the closing of the deal. Escada, which filed for insolvency in August, is expected to announce a buyer for the rest of the group this month. Sven Ley, the son of the founders of Escada, confirmed this week that he had bid for Escada. <>


-Versace Cuts a Fourth of Its Work Force - Whether presiding over a benefit gala at the Whitney Museum of American Art, where she is a benefactor, or being photographed for the tabloids with a haggard Lindsay Lohan or being honored at a celebrity lunch given for her by Tina Brown, Ms. Versace maintained her signature aura of high-maintenance glamour. But her composure, like her company’s Medusa logo, was a mask. Two days after Ms. Versace left New York to attend the Fashion Rocks concert in Brazil, Gianni Versace S.p.A., the family-held company over which she presides, announced that it would cut 26 percent of its worldwide work force, as many as 350 jobs. It projected a loss of $45 million in 2009 and no return to profitability before 2011. <>


-Unilever Net and Sales Beats Estimates on Price Cuts - Unilever, the world’s second-largest consumer products company, reported third-quarter profit and sales growth that beat analysts’ estimates after cutting prices in Europe to snare cash-strapped shoppers. Revenue excluding acquisitions and currency swings rose 3.4 percent, more than the 3 percent median of 13 analyst estimates in a Bloomberg News survey. Net income fell to 1.05 billion euros ($1.56 billion), the company also said today, exceeding the average estimate of 997 million euros. <>


-Snapfish’s retail pickup locations reach 10,000 under Wal-Mart deal - Online photo service Snapfish by HP is partnering with Wal-Mart Stores Inc. Inc to enable customers to pick up prints of photos they upload for processing to at Wal-Mart stores. Customers can now pick up photo prints or photo cards ordered on Snapfish at any of the participating 3,350 Wal-Mart stores as soon as one hour after placing their orders, Snapfish says. Snapfish customers locate and select a Wal-Mart store for pickup by entering their ZIP code at checkout. <>


-Google Introduces Commerce Search - Google Commerce Search was engineered with the online retail experience in mind. It purports to allow visitors to quickly find the products they seek; to filter results by category, price, brand or other attributes; to increase conversions and sales; to increase sales of specific products within search results; to conduct cross-sale and promotional offers; and to scale without glitches because of holiday-related traffic spikes. And all of these results are to be delivered alongside Google's analytics offerings for optimized performance and conversion. <>




The S&P 500 is up for three days in a row, rising 0.1% yesterday.  While the market had an “up” day yesterday, the internals of the market deteriorated.  Yesterday, the Financials broke TREND and is now broken on both durations.  Over the past month the XLF has declined 2%, while the S&P 500 is up 2.2%.


The S&P 500 rallied for much of the day on a renewed focus on the global recovery theme, as the World Bank boosted its 2010 China GDP forecast.  Also, the market seem to benefit from the Fed's decision to not make any meaningful changes to interest rates or and changes to its policy statement. Although, trading following the FOMC decision was fairly choppy and the indexes saw a meaningful pullback in the last half-hour or so of trading. 


On the day the VIX declined 3.8%, also declining for the second day in a row.  The UUP, the etf used to track the dollar index, was down 0.7% on the day.


The three best performing sectors were Healthcare (XLV), Utilities (XLU) and Technology (XLK), while Energy (XLE), Industrials (XLI) and Financials (XLF) were the bottom three.  All of the bottom three sectors were down on the day. 


The Healthcare (XLV) moved higher for the second straight session with the HMO’s leading the way.  Yesterday’s performance was largely driven by thoughts that Republican wins in the NJ and VA governor races could dampen the appetite for aggressive healthcare reform. There is even some speculation that reform legislation may be pushed back to next year. 


The Financials (XLF) was one of the worst performing sectors yesterday, closing down 1.4%. The regional banks remained under pressure on capital and CRE concerns.


The Consumer Discretionary, especially retail stocks lagged the broader market again yesterday with the etf closing flat on the day.  The underperformance came despite an upbeat tone to today’s release of October same-store sales.


Today, the set up for the S&P 500 is: TRADE (1,064) and TREND is positive (1,027).   The Research Edge quantitative models have 6 of 9 sectors in the S&P 500 positive on TREND and 1 of 9 sectors are positive from the TRADE duration.  Consumer Staples is the only sector positive on both durations and the Financials broke TREND. 


The Research Edge Quant models have 2% upside and 2% downside in the S&P 500.  At the time of writing the major market futures are poised to open up to the upside. 


The Research Edge MACRO Team.






Early Look

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The Obstinate One

“Nothing is more obstinate than a fashionable consensus.”
-Margaret Thatcher
Per our friends at being obstinate is “characterized by inflexible persistence or an unyielding attitude.”
I am no longer going to call him Heli-Ben. The cartoons and the free moneys… I’m done with those. This isn’t funny anymore. I am going to call him The Obstinate One. Shame on you Ben Bernanke. Shame on you.
Bernanke pandered to the political wind again yesterday. Never mind the original justification for going to this “emergency rate” of ZERO percent on your hard earned savings accounts. It’s time for The Obstinate One to make up new narratives that support the political position. He didn’t change anything in his “exceptional” and “extended” language. He made it clear that he won’t raise rates until both inflation and employment rise.
Let’s consider both:
1.      US Employment - He’s more of a 1930’s Great Depression guy, so he obviously doesn’t remember the 1970’s. Most Keynesians would rather not remember those STAGFLATION days either. They were professionally embarrassing for “economists.” Yes, Obstinate One, you can have a jobless recovery in inflation.

2.      Inflation - Newsflash: reported deflation already bottomed at -2.1% in the July of 2009 CPI report. Sequentially, Consumer prices will continue to rise (or REFLATE); particularly in the next 3-6 months. Yes, Obstinate One – that’s what we call an accurate Research Edge Macro forecast.

Yes, Obstinate One, we understand that the government has changed the way inflation is calculated 9 times since 1996. Yes, we understand that, as a result of the calculus, its now almost mathematically impossible to have core CPI reported north of 3%. Yes, we understand that Washington will never have to worry about inflation because they don’t use prices at the pump.
Americans should just stop whining, and take a cab. Enough already. The Obstinate One has successfully arrested the depressions and deflations in Wall Street bonuses. He’s been hired for another term. There is a strong case here for the willfully blind to have Washington fear-mongering consensus stay the course.
Into and out of the FOMC announcement, here’s what marked-to-market leading indicators of price inflation have done:
1.      The US Dollar broke my critical immediate term TRADE line of support ($76.20), trading down to $75.74

2.      The SP500 closed up for the 3rd day in a row, taking its REFLATION from March 9th back up to +55%

3.      The CRB Commodities Index closed at 276, taking it’s week-to-date price gain up another +2.2%

Here’s The Obstinate One’s Christmas present to the citizenry who should just take his word for it on inflation:
1.      Oil in a Bullish Formation (positive TRADE, TREND, and TAIL): immediate term support/resistance = $75.81/$81.41

2.      Dr. Copper in a Bullish Formation: immediate term support/resistance = $2.88/$3.05

3.      Gold in a Bullish Formation: immediate term support/resistance = $1054/$1095

How about “Great Depressions” in prices of International Equity markets that are now using our Burning Buck to carry trade?
1.      China closes up for the 5th consecutive day taking the YTD gain on the Shanghai Composite to +71%

2.      Brazil took a sniff of The Obstinate One’s free moneys and raced +2% higher into the close yesterday at +70% YTD

3.      Russian stocks are up again early this morning taking their YTD gain to +109%

Ah, who cares about the Russians, Brazilians, and the Chinese building economic power in this day in age. America has a lot of that to give, no? Are there any unintended consequences associated with Putin gaining political power again via petrodollars? How about Chinese military aspirations?
Who cares about all this when the American citizenry can fund it via a Piggy Banker yield curve (the spread between 10-year Treasury yields and 2-year yields has shot up to +263 basis points overnight as The Obstinate One politicized the short end of the curve)? Who needs to talk about these marked-to-market realities like a 3-month US Treasury rate of return of 0.05% (ZERO)?
If this weren’t so pathetic it would upset me. Instead, I’ll just sell American (I’m still short the US Dollar), and move on. Global capital flows to rates of return. Let’s not get patriotic about this – Japan already tried. The Australians get it. The Norwegians get it. The Indians get it. They want The Client’s (China) savings, and they’ll put a rate of return on it.
I have dropped my Asset Allocation to US Equities down to 3%. I have immediate term TRADE resistance for the SP500 at 1064. Intermediate term TREND support is now inching closer to the future that the perceived wisdom of The Obstinate One is signing off on – that line is 1027 – watch it, real-time.
Best of luck out there today,


EWZ – iShares Brazil President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

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.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20. TRADE and TREND bearish.

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.

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.   

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.

XLI – SPDR Industrials
Industrials shot up +1.1% on 11/3 because of a monster Berkshire bid. That’s now in the price of XLI. We’ll short expectations for V-shaped recovery. TRADE bearish, TREND bullish.

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. The announcement of further bank stimulus and talk of the BOE increasing its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. The sector is broken from an immediate term TRADE perspective.

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.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. There continues to be no government plan to support it.

FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

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.


Do I smell a converts deal and/or equity deal?


Yesterday, MGM announced that it entered into the 7th amendment to its credit agreement.  We wouldn't be surprised if MGM were to issue converts and/or equity on the back of a strong quarter and bullish conference call.


This most recent amendment allows MGM to issue new debt as long as that debt doesn't have seniority over the bank debt or debt that is being refinanced with the issuance proceeds and extends MGM's maturities.  It also allows for an equities issuance that doesn't result in a change in control.  The only give back from MGM is to permanently reduce the bank debt commitment upon any issuances that aren't going towards reducing existing maturing bonds. Below is a summary of Amendment #7.

  • Allow MGM to incur an additional $1BN of debt, provided that the debt is unsecured and covenants are no more restrictive than those contained in MGM's current "Qualified Unsecured Debt"
  • Other than the first $250MM, 50% of the proceeds from any issuance are required to pay down "Qualified Unsecured Debt", specifically proceeds will go towards permanently reducing MGM's term loan and revolving credit facility on a pro-rata basis
  • MGM may also issue "Refinancing Indebtedness" so long as the Refinancing Indebtedness:
    • Has a maturity that dates six months post the maturity of the Credit Agreement and is longer dated than the debt it is meant to take out
    • Is not senior to the Refinanced Indebtedness
    • Amount is not more than 125% of the Refinanced Indebtedness
    • Covenants are no more restrictive than those contained in the company's existing senior secured indentures
  • Company may issue additional equity so long as such issuance does not result in a change of control
    • Other than the first $500MM, MGM must apply 50% of the net proceeds from any issuance towards the permanent reduction of MGM's term loan and revolving credit facility on a pro-rata basis