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YUM’s investor conference is coming up on December 9th.  This annual meeting in New York typically proves to be helpful to me as management takes the time to provide not only an overview of current business trends but also to give more details around current initiatives at each business segment.  I recently received the agenda for this year’s meeting (included below) and was shocked to see that both a U.S. Overview and China Overview were missing from the agenda.   


I understand that YUM management has supplemented this annual meeting in the last couple of years with additional investor days throughout the year so it might be a waste of time to replicate that level of detail at its New York meeting.  Specifically, YUM hosted separate Taco Bell, KFC, Pizza Hut and YRI Investor days throughout this past summer and management should be commended for dedicating that much time to the investor community. 


The agenda for the December meeting, however, seems to focus only on YUM’s areas of business, which are currently strongest and fails to address issues in the U.S. and China where sales trends have been the weakest.  I realize that CEO David Novak will likely address both the U.S. and China in his Yum! Overview but judging from the last earnings call when about 70% of analysts’ questions (a good gauge of investor interest in my opinion) were focused on both the U.S. and China, these are the areas of the business about which investors have the most questions and concerns.  And, being that the U.S. and China combined account for about 70% of YUM’s segment operating income, investor concerns are warranted.


Regarding the U.S. business, we will only be hearing specifically about Taco Bell, which is arguably the company’s strongest U.S. concept.  Same-store sales turned slightly negative in Q3, but this is not surprising relative to the recent softening and increased discounting we have seen across the board for the QSR industry.  More concerning is the 13% comparable sales decline at Pizza Hut and the 2% decline at KFC which came only one quarter after the Kentucky Grilled Chicken launch.  Yes, we already heard about Pizza Hut and KFC during the summer investor days, but we also heard about Taco Bell.


We will also be hearing more about YUM’s initiatives in France and India.  We know management feels good about its growth opportunities in both of these markets because they have highlighted them both in the last two earnings calls.  On its 2Q09 earnings call, management commented, “Yum! Restaurants International’s new growth markets delivered 16% system sales growth this quarter with the benefit from new unit development in high growth markets like France and India. Our KFC France business generates the highest KFC average unit volumes in the world of roughly $4 million per year. With this kind of sales, we believe we have the unit economics to drive scale and can expand KFC rapidly from 79 units and modest profits today to over 300 units and at least $100 million in profits in France.


Likewise, India continues to drive impressive growth. We now have nearly 50 KFCs. Same-store sales are up around 25% and we now have double-digit store level margins. We are more confident than ever that we will be able to build significant KFC scale.”


I think it is important for management to spend time talking about its biggest growth opportunities as investors need to know where we go from here.  I also think that investors need to understand the current issues and what is being done to address them now in order to feel more comfortable with the company’s future prospects.  We will see what management has to say on December 9th.  Stay tuned.




McCullough Says Dollar Lacks Credibility, Fire Geithner


Trends improved from September on a 1-year basis but continued to decelerate on a 2-year average basis.


Malcolm Knapp reported that October casual dining same-store sales declined 4.9% with traffic down 4.4%.  Given what we learned from a handful of casual dining restaurant operators about trends in October, it is not surprising that October trends improved sequentially from September levels on a 1-year basis when comparable sales declined 6.4% and guest counts came in -5.3%.  Specifically, PFCB, TXRH, BWLD and MSSR all stated that they experienced sequentially better sales trends in October. 


If you look at 2-year average trends, however, the October numbers do not provide any reason to be optimistic as both same-store sales and traffic trends continued to decelerate from September.  Demand in October was not as bad as last December when trends bottomed, but on a 2-year average basis we not that far from it with the October comparable sales 2-year trend down 5.5% relative to -6.7% in December 2008. 


We will have to wait and see how restaurant trends have fared in November and for the remainder of the quarter, but I am not optimistic that we will see a much of a recovery from these levels.  Easy comparisons are meaningless and restaurant demand will not pick up until people stop losing their jobs.  For reference, Malcolm Knapp’s reported November numbers will look extremely weak on a YOY basis as last year’s result was helped by a later Thanksgiving.



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Math Monkeys: SP500 Levels, Refreshed...

In the chart below, we have outlined our TRADE and TREND lines for the SP500.


While there is an important immediate term TRADE line of resistance at 1110 (the closing high for the YTD that was established on 11/17), our Hedgeye Math Machine is spitting out a higher-high at 1117 (dotted red line). We Math Monkeys will be managing risk proactively toward 1117 being probable, in the immediate term.


Why is it probable? Well, primarily because the US Dollar has yet to breakout above it’s TRADE line at $75.57. The Bombed Out Buck has backed off it’s early morning highs and is currently trading at $75.11, so anything can happen here. For now, the US Dollar remains broken across all 3 of our risk management durations – we call this a Bearish Formation.


There is plenty of downside risk to manage toward, particularly if the Buck were to breakout. We have no support for the SP500 until 1083 (dotted green line). The more formidable bullish TREND line for the SP500 is down at 1051. A YTD peak to TREND line correction would be a -5.3% move. That would be tolerable.



Keith R. McCullough
Chief Executive Officer


Math Monkeys: SP500 Levels, Refreshed...  - setup


In contrast to last week, the housing data points over the last two days suggest that the housing market is still improving on the margin!


The most recent Case-Shiller data for the month of September suggests that home prices in 20 U.S. cities rose for a fourth straight month.   The Case-Shiller home-price index increased 0.27% the prior month on a seasonally adjusted basis, after a 1.1% rise in August.  Year-over-year, the index fell 9.4% from last September 2008, which represents the smallest year-over-year decline since the end of 2007.


The strength in the existing home sales reported yesterday, aided by government stimulus programs and a decline in mortgage rates are helping to stem the decline in home prices.


So where do we go from here…?  I continue to believe that home buying and consumer spending in general will be hampered by higher unemployment, which is closely correlated to increased foreclosure activity.  This will limit the improvement in sales and thus pricing trends as we head into 1H10.


Other issues to consider when thinking about how far prices can improve from here are the current inventory overhang, the level of shadow inventory, continued foreclosures, and tighter credit standards which require more money down...


For the second day in a row, from an equity perspective, the MACRO housing data is not confirmed by the performance of the homebuilders.  The Homebuilders finished lower yesterday and the stocks are some of the worst performing stocks in the XLY today. 


Howard Penney

Managing Director





The Tradeoff: Healthcare versus Approval Rating

“In discussions with dozens of health-care leaders and economists, I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it.” –Jeffrey S. Flier, Dean of Harvard Medical School


In staking his approval rating and perhaps even his and his party’s intermediate term political future (think mid-terms and 2012) on the healthcare debate, President Obama has clearly rolled the dice. To Dean Flier’s point above, this debate has become more than a debate about healthcare, but a strongly partisan debate about the future of American society and the use of government funds.  As David Brooks wrote yesterday in the New York Times:


“The bottom line is that we face a brutal choice. Reform would make us a more decent society, but also a less vibrant one. It would ease the anxiety of millions at the cost of future growth. It would heal a wound in the social fabric while piling another expensive and untouchable promise on top of the many such promises we’ve already made. America would be a less youthful, ragged and unforgiving nation, and a more middle-aged, civilized and sedate one.”


Perhaps as a newspaper columnist Brooks is being a bit melodramatic, but this debate does center around the trade off of a massive expansion of government versus potentially raising the standard of living for some segments of society.  For Obama, this tradeoff is between popularity and getting this landmark legislation passed.  To date, his approval has suffered brutally in this battle.  This morning, the Rasmussen Presidential Approval Index clocked Obama in at -13, which is the difference between Strongly Approve at +28 and Strongly Disapprove at +41.  This rating is consistent with the last two weeks in which the President’s Approval Rating has been the lowest of his Presidency.  The Real Clear Politics poll average verifies this point as well, which has the President Obama’s average approval rating at 50.4.  This is the lowest approval rating of his Presidency on that index as well.


Given where the economy is based on unemployment, President Obama is actually faring quite well versus his predecessors.  Specifically, Ronald Reagan had an approval rating that was closer to +35 when unemployment was over 10%.  (We have outlined this in the chart below.) The implication is likely that Obama’s predecessor is still being blamed for the current weak economy in the U.S. The acceleration of the healthcare debate and the growing criticism of the new bill has brutalized Obama’s approval rating though.  According to a Rasmussen Poll that was taken on November 21st and 22nd, a mere 38% favor the bill and 56% oppose the bill.  This delta of 18 points between favor and oppose was the worst spread by 6 points and consistent with his decline in approval.


President Obama’s approval rating seems to have somewhat survived the weak economy, at least based on historical perspectives.  The question remains whether it can survive the highly partisan and emotional healthcare debate.  So far, President Obama looks willing to roll the bones on that one.  But, undoubtedly, a failure of healthcare and its likely long lasting impact on his approval rating will limit any willingness to take political risks on a go forward basis.


As an early leading indicator, President Obama’s Afghanistan policy appears to be one that is positioned to take little political risk.  According to reports out this morning:


“President Obama is expected to address the nation Tuesday evening, 1-Dec on his new Afghanistan policy. The news comes after the President met with his national security team last night to finalize a plan to dispatch ~34,000 additional U.S. troops to Afghanistan. Reports indicate that the plan will call for the deployment over a nine-month period beginning in March and will contain points starting next June at which Obama could decide to continue the flow of troops, halt the deployments and adopt a more limited strategy, or begin looking very quickly at exiting the country.”


The President is clearly intending to leave the door open on his Afghanistan policy.  Indecisiveness, as it relates to foreign policy, potentially also has approval related issues.



Daryl G. Jones
Managing Director


The Tradeoff: Healthcare versus Approval Rating - Obama


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