The Economic Data calendar for the week of the 9th of November through the 13th 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.
Position: Short US Consumer Discretionary (XLY)
From Parts Unknown (our new Sector Head for Financials who we have yet to announce)…
Here’s a look graphically at Consumer Credit (updated for today’s 3pm data).
If a picture tells 1,000 words, then the song remains the same. It’s the second chart that’s actually more telling though. A full year after Lehman revolving credit is grinding to a halt at the second fastest rate in the last 12 months.
Further evidence that the consumer is (a) getting weaned off easy money by the still cash-strapped banking system, (b) voluntarily electing to save in lieu of buying the plasma for the 3rd bathroom.
Keith R. McCullough
Chief Executive Officer
Research Edge Position: Short UK (EWU), Short British Pound (FXB)
When we speak of “imported” inflation we’re talking about the relationship between the strength of a country’s currency versus the price of goods and services it imports. With respect to the UK, an import and service based economy, the depreciation of the British Pound since mid ‘08—which we’ve named The Pounded Pound—has bred inflation (for both Producers and Consumers) as the depreciation in the currency has not only diminished purchasing power for its citizenry at home (as more money is needed to chase goods and services), but it has also reduced purchasing power versus its primary import partners. Finally, the global appreciation in the price of oil, denominated in US dollars and therefore boosted by the inverse correlation of depreciating USD (without consideration of supply and demand dynamics), has inflated energy costs for importing nations like the UK.
Therefore, with the depreciation of the Pound and the rise in oil prices (a major cost component for Producers), it comes as no great surprise to see a sequential and annual rise in the UK Producer Price Index. In fact, Input Prices, the materials and fuels manufacturers buy, rose 2.6% in October versus the previous month, while Output Prices, or what manufacturers sell, increased 0.2% sequentially or 1.7% Y/Y. The take-away here is (see chart below) that cost inputs are trending positive and upward in the UK, while outputs have remained positive, but stable over the last year. This price inflation should compress margins for Producers, costs that will eventually be passed on to the consumer.
If the above rhymes, we must also mention that UK Consumer Price Index, in aggregate, has declined over the last months, from 1.6% in August Y/Y to 1.1% in September. This decline can be attributed to a sluggish economy, still searching for growth with Q3 GDP registered at -0.4% Q/Q, annual declines in energy costs, and rising unemployment, all of which should put pressure on broader fundamentals. Further we hold that with the Treasury continuing to print money, including issuing a second wave of bailouts to RBS and Lloyds to the tune of 40 Billion Pounds this week, and the BOE expanding its bond purchasing program while keeping rates steady at a historic low of 0.5% will sustain a weak Pound, which should encourage inflation.
In our virtual portfolio we remain short the UK via the etf EWU and short the Pound via FXB. We expect to see continued underperformance in UK fundamentals. With the economy looking to return to moderate growth by the end of the year, Producer Inflation may remain a major headwind over the intermediate term.
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A look at good, neutral, or bad numbers…
MCD is scheduled to report October same-store sales numbers before the market opens on Monday. Management provided the following outlook for October sales trends on its 3Q09 earnings call:
“As we move through October, consolidated comparable sales remain positive with Europe and APMEA contributing strong results. In the U.S., despite continued gains in market share and advancement in our industry-leading position, we're expecting flat to slightly negative October comps. This is due in part to the current economic environment and strong results a year ago. We do not believe, however, that this is a change in the overall trend in performance in the U.S.”
Taking those comments into consideration, I wanted to provide comparable sales ranges for each geographic segment as a benchmark of what I think would be GOOD, NEUTRAL, or BAD results based largely on 2-year average trends.
U.S. (facing a relatively difficult +5.3% comparison from last year):
GOOD: Any number better than flat would signal that the company’s trends came in better than management’s guidance. The company needs to report at least +0.6% to just maintain its 2-year average trends from August and September. So this month, even a GOOD result will most likely point to a continued deceleration in 2-year average trends.
NEUTRAL: -1% to flat would signal that full month trends were in line with management’s guidance. So this range of results, though neutral from an investor sentiment perspective as it relates to expectations, is not a favorable sign for current trends. MCD has not reported a decline in U.S. same-store sales growth since March 2008. This neutral range also implies a continued deceleration in 2-year average trends.
BAD: below -1% would be worse than expectations as set by management. A -1% number points to an 85 bp sequential decline in 2-year average trends. A -1.5% or below would be very BAD as it implies a 2-year average trend of less than 2%. MCD has not posted 2-year average trends below that level since early 2003.
Europe (facing a relatively tough +9.8% comparison from last year):
GOOD: +4.5% or better would signal an acceleration in 2-year average trends from September levels and a return to the 7%-plus levels MCD has experienced for the greater part of the year.
NEUTRAL: +2% to +4.5% would point to 2-year average trends that are about even with to slightly better than what we saw in September. Investors are most likely expecting some sequential improvement as management said Europe and APMEA are “contributing strong results” in October.
BAD: below +2% would imply a slight slowdown in 2-year average trends and anything below 1% would be viewed as really BAD as it would signal a return in 2-year average trends to the low reported June levels.
APMEA (facing a relatively difficult +11.5% comparison from last year):
GOOD: +2.0% or better would signal an acceleration in 2-year average trends. A +2.5% or better would be really GOOD as it would imply a return to the 7%-plus 2-year average trend we saw earlier in the year.
NEUTRAL: flat to +2% would point to 2-year average trends that are consistent with to slightly better than what we saw in September. Like Europe, based on management comments, investors are most likely expecting some sequential improvement in APMEA.
BAD: any number below a flat result would imply that 2-year average trends have slowed somewhat. Although MCD reported a negative comp in August, I think the sticker shock associated with seeing this segment go negative again would be bad. Any number below -2% would be really BAD as it would imply a return to the softened 2-year average levels we saw in June, July and August.
On a relative basis, 3Q09 was not a bad quarter for CPKI with same-store sales down 8%, which came in only 0.5% below management’s initial guidance. During the quarter, price was up 2.6% and traffic was down 10.6%. Management’s comment about current trends that “easy comparisons have yet to restore momentum to the industry” was interesting and only reinforces my belief that Q4 estimates across the industry are relying too much on a sales recovery based on easy comparisons. California continues to be a problem for CPKI.
The company reported $0.24 per share, in line with October guidance. CPKI reported that total revenue declined 5.3%. Lower food costs (offset by higher labor costs), lower pre-opening costs and a lower tax rate enabled CPKI to grow net income by 17% and EPS by 20%.
CPKI’s off-premise sales had grown to 18% of restaurant sales, of which takeout was 14% and delivery was 4%. In 3Q09, however, off-premise sales fell to 16% as delivery declined to 2%. Part of the decline can be attributed to high unemployment and office vacancy rates in California. Food service comps for the third quarter were only down 7% and off-premise contributed a negative 1%.
On a monthly basis, July same-store sales declined 9% (-1.3% last year), August was down 7.2% (-2.2% last year) and September was down 7.3% (-4% last year). System wide, CPK restaurants delivered AWS of $60,945, down 8.7% year-over-year.
Kraft royalties were up 35.2% in the quarter and management expects Kraft to spend a significant amount promoting the CPK brand this year. CPKI is working cooperatively with Kraft on several initiatives to increase brand awareness for both its frozen product line and full service restaurants.
According to management, real estate opportunities in 2010 are among the best it has seen in years. Available space is providing attractive locations and terms. CPKI is targeting 8 new locations in 2010; all outside California.
Some new Initiatives in the restaurant to help fight declining sales trends:
4Q09 GUIDANCE - 4Q09 EPS guidance of $0.16 to $0.18 assumes a same-store sales decline of -5.5% to -6.5%. For the month of October, same-store sales were down 6.1% versus 7.3% last year. We can add CPKI to the list of casual dining companies that is seeing sequentially better trends in October.
Suffice to say, this morning’s US Employment report for the month of October was not good.
So why is the stock market up? Answer: The US Dollar. The US Dollar is down for the 4th week out of the last 5. The Buck continues to Burn.
What’s negative for the US economy is negative for the US Dollar. What’s negative for the US Dollar is positive for most things priced in dollars. If you didn’t know about this perverse relationship between the price of the US Dollars and everything else, now you know.
Put another way, if the Federal Reserve’s Pander Program hinges on “the data”:
That’s why we are so focused on this dynamic relationship between the Fed and the Dollar. The politicization of the Fed perpetuates US Dollar weakness.
In the charts below, Matt Hedrick and I show both the size and context of this morning’s jump in the unemployment rate. The most important takeaway, as always, is what we observed on the margin. On the margin, the rate of US unemployment accelerated sequentially. You can see this in the bar chart below (the red arrows are accelerations; the green ones are decelerations).
The unemployment rate accelerated its recent monthly pace of gains to +40 basis points month-over-month (from 9.8% in September to 10.2% in October). You have to go all the way back to May of 2009 to find a monthly acceleration in the employment rate that surpasses October’s.
In Q1 our call was that the unemployment rate would decelerate in Q2. It did.
In Q4 our call is that unemployment will remain pinned up in no man’s land. We don’t think we’ll see another 40 basis point acceleration in November’s unemployment rate, yet. We need more data on November jobless claims to make that call just yet.
The Fed will use this data point to justify their pandering to a perpetual policy of ZERO return on the American citizenry’s savings. The only thing worse than being unemployed in this country, is being unemployed with a savings account.
Keith R. McCullough
Chief Executive Officer