“As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.”
–John F. Kennedy
Every morning since I left the Carlyle Group’s hedge fund, I have woken up on a mission. My mission is to prove myself – not to them, but to me.
I want to prove myself worthy of the opportunity that this great country has provided me. Freedom of thought. Freedom of speech. These are freedoms to live by.
This American Thanksgiving is very special for my family. My wife, Laura, is expecting our second child. My son, Jack, is getting ready to skate. The highest appreciation I can give to them, is to live for them.
When I drive up 95 to New Haven every morning, I think of them. Then I express whatever I have in these arthritic hockey knuckles to you. All I have is 45 minutes of writing time, then edits. I know I’m not always the easiest person to agree with. Nor am I the easiest to always like. So, I’d like to take this brief opportunity to thank all of you.
Thank you for your time. Thank you for your patience. And, most of all, thank you for providing me the resources to build a wonderful American firm. We have hired 34 people in the past 18 months. I live by them too.
Before I thank one more core constituency who makes every morning missive possible, I’ll take a moment to address something my Macro Team always gets asked for throughout the day - our intermediate-term TREND lines.
Here are my top 12 country levels – refreshed for this morning’s prices:
1. SP500 = 1051 (bullish)
2. Nasdaq = 2089 (bullish)
3. US Financials (XLF) = $14.61 (bullish, barely)
4. Chinas’ Shanghai Composite = 3051 (bullish)
5. Japan’s Nikkei = 10,169 (bearish)
6. South Korea’s KOSPI = 1626 (bearish)
7. UK’s FTSE = 5049 (bullish)
8. Germany’s DAX = 5563 (bullish)
9. Russia’s RTSI = 1261 (bullish)
10. Brazil’s Bovespa = 60,894 (bullish)
11. Canada’s TSE = 11,161 (bullish)
12. Australia’s All Ords Composite = 4607 (bullish)
Finally, I’d like to thank our troops.
They watch over us every night. They ensure that guys like me can run my mouth, and that gals like you can hit me back. These are the men and women that make our Thanksgivings possible. They do not “utter words”. They “live by them.”
Best of luck out there today.
VXX – iPath S&P500 Volatility — With the market hitting its YTD high on 11/23 we bought volatility.
XLK – SPDR Technology — We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).
EWA – iShares Australia —We remain bullish of Glenn Stevens at the RBA and how Australia is issuing its citizenry a rate of return. With growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.
XLU – SPDR Utilities — We bought low beta Utilities on discount on 10/20.
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.
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.
EWY – iShares South Korea — South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.
XLI – SPDR Industrials — We shorted Industrials again on 11/9 on the up move as the US market made a lower-high. This is the best way for us to be short the hope of a V-shaped recovery.
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%. Further bank stimulus and the BOE’s increase in 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.
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.
“As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.”
RETAIL FIRST LOOK
November 25, 2009
TODAY’S CALL OUT
As earnings season draws to a close, there are some notable callouts from our sentiment chart. The group’s total short interest continues to decrease, but at a lower rate than we have observed in some time. Key individual callouts are also noted.
As the group’s total short interest continues to decrease, but at a lower rate, there are some notable callouts. Our sentiment chart highlight’s some key individual moves, most of which are positive. The chart below focuses on the outliers from the sell-side (weighted buy, sell, hold ratings), the buy-side (short interest as a percent of float), and the inside (recent insider transaction movement). Here are the most notable changes over the last two months:
Stocks that are more loved: COLM, GAP, DDS, LIZ, PLCE, NTRI, M, AAP, and LAZ
Stocks that are more disliked: BKS, CONN, TBL, GIL, KBH, ELY, VFC
In looking specifically at short interest, there are some recent developments worth noting. As a group, the apparel, retail, and footwear space has seen short interest continue to decline. As always, there are some meaningful outliers:
Stocks with decreasing short interest: JOSB, CBK, VLCM, COLM, RL, CROX, PSS, UA, DKS, HBI, ANF,
GYMB, and HOTT
Stocks with increasing short interest: CHRS, LIZ, BONT, DDS, SKS, GCO
Enjoy your Thanksgiving with your family and friends.
LEVINE’S LOW DOWN
- On heels of a reduced outlook mainly due to incremental spending on Barnes & Noble’s e-reader launch, the company’s CEO believes digital content can be a multi-billion dollar business for the retailer. Management also believes that given large barriers to entry, digital content distribution has the potential to be a more concentrated business than physical bookselling. Barriers to entry cited include content aggregation on a massive scale, content formatting (i.e multiple platforms, multiple devices), digital rights management, and content synchronization. I’m not sure I agree, as it seems digital content distribution changes the players for which BKS will be competing with (i.e Google) rather than limiting the number such competitors.
- On the subject of heavy discounting by discounters of best sellers, BKS management reminded investors that this topic has been discussed for 10 years now. As it stands currently, best sellers account for 5% of BKS’ sales, with the very top sellers accounting for 1%. Approximately 50% of all books are sold in channels other than dedicated booksellers.
- In an effort to drive incremental traffic and maintain a competitive position in the marketplace, FRED stepped up its marketing and promotional activity in 3Q. However, the net result of the increased promos and ad spend was not incremental traffic gains or rub-off sales. Instead, Fred’s customers cherry-picked promotional items, causing a negative impact on gross margins. Management also noted that the competitive environment is expected to remain aggressive in 4Q, as media spend by retailers is anticipated to increase 45%-100% on average.
- Even with substantially better than expected 3Q EPS results, management of DLTR noted that the majority of upside on gross margins was due to improved freight and fuel costs. Offsetting these y/y improvements was the continued margin drag from increases in consumables as a percentage of the product mix. With substantial freight and fuel cost savings now behind us, we will not be surprised to see more and more retailers talking about challenging compares on these line items as we get into Spring.
- Genesco continues to lead the pack on cost savings from real estate renewals and negotiations. The company noted that is seeing on average a 10% reductions in rent as a result of its efforts. It’s also important to note that 50% of GCO’s store base is up for some renewal or kick-out clause over the next 3 years.
- At DSW, women’s boots comped up 50% for the quarter! Yes, that’s 50%. Boots represented about 20% of sales in 3Q and are expected to grow to 30% of sales in 4Q. Year over year penetration of the category is up about 500bps.
- E-commerce continues to be a relative outperformer when compared to the performance of the bricks and mortar. Both AEO and BKS cited positive sales growth in e-commerce, while both reported sales declines. Overall, e-commerce has been a big positive standout almost across the board for retailers with online sales capabilities.
- Despite a still challenging retail backdrop, J Crew reported its highest operating margin the company’s history in 3Q. While sales trends were strong, the company’s ability to flow fresh goods frequently, manage inventories tightly (down 17% per foot), and keep promotional activity to minimum were all key drivers to the standout results. While there was definitely some business left on the table as a result of the tight inventory control, management is content with selling out of items that work in effort to boost a “buy now” mentality on the part of its customers.
Consumer Confidence Rises - Consumer confidence rose for November as fewer shoppers said they expected business conditions or the labor market to worsen over the next six months, according to The Conference Board. The research group’s Consumer Confidence Index rose to 49.5 this month from 48.7 in October. A year ago, the index stood at 44.7. The Expectations Index increased to 68.5 this month from 67 in October and the Present Situation Index dipped to 21 from 21.1. “The moderate improvement in the short-term outlook was the result of a decrease in the percent of consumers expecting business and labor market conditions to worsen,” said Lynn Franco, director of the group’s Consumer Research Center. “Income expectations remain very pessimistic and consumers are entering the holiday season in a very frugal mood.” <wwd.com>
PPR chief expands on plans for sales and acquisitions - PPR chief executive François Pinault has revealed that he plans to sell the retail arms of the French group “the sooner, the better” but said he hadn’t created a deadline for the planned divestments. News broke on Monday that PPR, which owns the Gucci Group and Puma, is looking to sell its retail businesses, which include Redcats, the mail order firm that owns the La Redoute catalogue, as well as book and music retailer Fnac and furniture chain Conforma. Pinault told the Wall Street Journal yesterday: “We have a major weakness - retail. It is a business that cannot develop quickly abroad.” He added that this was because it takes consumers a long time to accept an unfamiliar name. In the interview, Pinault added that with global stock markets stabilising, PPR is reviving its strategy to focus on brands over retail - a strategy he began with the sale of the Printemps department store group in 2006. <drapersonline.com>
Schumer Calls Foul on Adidas for its Plans to Move NBA Jersey Production to Thailand from Upstate NY - Sen. Charles Schumer (D., N.Y.) on Tuesday urged Adidas to keep production of NBA and WNBA uniforms and apparel in the U.S. after the activewear firm’s contract manufacturer in upstate New York said production was moving to Thailand. Adidas has an exclusive contract with the NBA to supply the league’s teams with their official uniforms. “It’s flat wrong for Adidas to move the production of jerseys worn by NBA players outside the United States when there are U.S. companies that have done this work so well and for so long,” Schumer said. “And to do it in this economic climate adds insult to injury.” He called on the company to reverse its decision and continue producing jerseys in the U.S. Adidas said it was moving production “to facilities located closer to the source of uniform materials.” <wwd.com>
Saks Renegotiates $500M Credit Agreement - After months of work, Saks Inc. successfully negotiated a two-year extension and amendment for its $500 million revolving credit facility, which now expires in November 2013. “This year we undertook a series of important actions that strengthened our capital structure and will provide considerable flexibility going forward,” said Kevin Wills, executive vice president and chief financial officer. “In addition to the extension and amendment of the revolving credit facility, we issued $120 million of convertible notes in May, and we completed a $100 million common stock offering last month. Proceeds of those transactions were used to reduce borrowings on our revolving credit facility.” <wwd.com>
Will Pent-up Demand Drive Sales? - The positive effects of perceived pent-up consumer demand could be lost in the Great Tradedown. Analysts and economists agree shoppers are getting tired of reining in spending. But even with their self-control weakening, a budget-breaking spree seems unlikely. Consumers are more likely to shop the off-price channel, snatch up discounted goods or treat themselves to a special gift. “We do see demand increasing,” said Christine Day, chief executive officer of Lululemon Athletica Inc. “It is driven by less inventory and choices — a higher sense of urgency to buy and careful investment in a few good pieces for the woman that has not bought for herself in quite a while.” Like others retailers, Day isn’t looking for consumers to return to a credit card-propeled shopping existence anytime soon. “I hear more conversation about saving for a carefully thought-out purchase, and I think that will stay with us for a while,” she said. The total amount of outstanding consumer credit fell at an annual rate of 7.2 percent in September and has dropped for eight consecutive months — the longest string of declines since 1943, when the Federal Reserve began keeping records. <wwd.com>
Fed Officials Cut Forecasts for Unemployment Rate - Federal Reserve officials trimmed their forecasts earlier this month for the U.S. jobless rate in 2010 and 2011 as the economy rebounded while keeping their outlooks “broadly similar” to previous projections. Fed governors and regional-bank presidents predicted the unemployment rate will range from 9.3 percent to 9.7 percent in next year’s fourth quarter, down from the June projection of 9.5 percent to 9.8 percent, according to minutes of the Federal Open Market Committee’s Nov. 3-4 meeting released today. Chairman Ben S. Bernanke and other policy makers on Nov. 4 said they would keep interest rates “exceptionally low” for an “extended period.” The statement by the FOMC suggested a decision to raise rates will hinge on changes in the labor market, inflation and inflation expectations. <bloomberg.com>
U.S. Consumer Spending, Incomes Probably Improved in October - Consumer spending probably rebounded in October, an indication that mounting unemployment has yet to stifle Americans’ willingness to buy. Purchases increased 0.5 percent after dropping by the same amount in September, according to the median estimate of 75 economists surveyed by Bloomberg News. Other figures may show orders for durable goods and home sales climbed. Uneven gains in spending signal consumers are unlikely to provide sustained support to the U.S. economy as it emerges from the worst recession since the 1930s. A jobless rate that is projected to exceed 10 percent through the first half of next year means households will contribute less to growth. <bloomberg.com>
China: Excess capacity intensifies in textile sector - According to the " report of follow-up investigation on questionnaires among Chinese enterprise managers in 2009, the industries of textile, papermaking and chemical fibers how the situation of relatively serious overcapacity. Survey results show that more than 60 percent (63.4 percent) of business operators consider that their business sectors exist excess capacity, among them, 44.8 percent believe their sectors exist "some surplus capacity" 18.6 percent say that their sectors exist "serious surplus capacity"; 27.5 percent believe their sectors are "normal"; 9.1 percent think their sectors exist insufficient capacity, 8.4 percent feel their sectors exist "some shortage in capacity", 0.7 percent say their sectors exist "seriously inadequate capacity." <fashionnetasia.com>
Zappos.com Partners with Overlay.TV - Zappos.com has partnered with interactive video firm Overlay.TV to bring its catalog of products to life through video and to transform the way customers interact with the online store. The clickable videos are fully integrated with the site's e-commerce back-end and reflect inventory events such as out-of-stock and discontinued items as well as promotions and special offerings. The solution enables viewers to shop directly from videos that can be shared across the web on blogs and social network profiles. "The ability to see a product in action, to click on it for more information, to share it on Facebook, and add it to your cart without even leaving the page is a major change for this industry," says Rob Lane, CEO and Co-Founder of Overlay.TV. "Our approach is 100% about improving the customer experience, and giving them the tools to share that experience with their networks, which makes what we're doing a perfect fit for Zappos." <sportsonesource.com>
Japan Exports Fall Least in a Year on Global Stimulus - Japan’s exports fell at the slowest pace in a year in October as worldwide government spending boosted demand, sustaining the economic recovery. Shipments abroad slid 23.2 percent from a year earlier, compared with a 30.6 percent decline in September, the Finance Ministry said today in Tokyo. The median estimate of 18 economists surveyed by Bloomberg was for a 26.8 percent drop. <bloomberg.com>
Italy Consumer Confidence Rose in November on Economic Outlook - Consumer confidence in Italy unexpectedly rose in November after the economy emerged from its worst recession since World War II. The Isae Institute’s consumer confidence index climbed to 112.8 from 111.7 in October, the Rome-based research center Isae said today in an e-mailed statement. Economists had forecast a drop to 111.5 for this month, the median of 13 estimates in a Bloomberg News survey showed. Italy’s economy emerged from its fourth recession since 2001 in the third quarter as the recovery in Europe boosted exports, and growth may accelerate to more than 1 percent in 2010, Finance Minister Giulio Tremonti said yesterday. <bloomberg.com>
China's One-Child Generation Clamors for Luxury Goods - The X factor in China’s burgeoning luxury consumption is the country’s one-child generation — a group of people who tend to be highly individualistic and perceive luxury goods as a way to set themselves apart. The population policy, in place in China’s cities for 30 years, has created a value system among these millions of only-children that is “more self-indulgent and self-interested” than the more communal ways of their predecessors, said Patti Pao, president and founder of strategic consultant Pao Principle and author of a new “China Luxury Panel” report. The rising tide of young adults [are] clamoring for the fast-fashion, designer one-offs of stores such as H&M and Zara, and the cheap chic of players like Uniqlo. <wwd.com>
Luxury Outlook Brightens - Down but not out, the luxury market is looking to new categories - plus female and older consumers - to boost its bottom line in 2010. That was one of the messages at the “Luxury Beyond The Crisis,” a conference organized by The International Luxury Business Association and held at the Hotel Westin in Paris Tuesday. New luxury categories - including technology, furniture, travel and spas - will help the sector register a 4 percent revenues increase next year, according to Jean-Marc Bellaïche, partner at Boston Consulting Group in Paris. Minus such categories, a 3 percent dip is projected for the sector, he noted. While luxury fashion brands are already rallying in Far East, Bellaïche said he is also optimistic about growth prospects in the U.S., where recent surveys suggest the awareness of luxury brands is less pervasive. “The U.S. is a growth market, but we still have to find the key,” he said. <wwd.com>
Recession-era Black Friday Filled With Challenges - After more than a year of recession fallout that made holiday 2008 a retail Waterloo, stores will put their austerity strategies to the stiffest test when the season moves into high gear on Black Friday. But the mood of shoppers is a stiff challenge, although after a year of tightened wallets and economic hardship, there is a perception of some pent-up demand among consumers that could benefit stores. (See story, opposite page). Lew Frankfort, chief executive officer of Coach, said consumers have been trained to wait for sales, and the response of retailers to that face-off will dictate the tone of the holiday. <wwd.com>
Free shipping remains the best bait for luring online shoppers, survey says - Online shoppers are cutting back on their spending and looking for free shipping offers and exclusive online deals, says a survey from The Conference Board and TNS. Another survey shows nearly a third of consumers plan to shop from work next Monday, and a third suggests many consumers remain concerned about using their credit card online, but will shop on the web anyway. Consumers who plan to shop online are being a bit more frugal, according to the survey from The Conference Board, a nonprofit management organization, and research organization TNS. The survey of 3,946 adults conducted Nov. 2-8 found: <internetretailer.com>
Sears.com begins shipping to 90 countries - Sears.com has begun shipping to consumers in 90 countries, including the U.K., France, Germany, Spain China, India, Japan, Argentina and Brazil. "We are excited to offer this new international shipping option to our customers," says Imran Jooma, senior vice president for online at Sears Holdings Corp. "With our large product assortment and the capability to ship products internationally, we hope to make shopping easier and more convenient, both for customers in the U.S. with friends and family overseas, and for international customers who would like to purchase products from Sears.com." <internetretailer.com>
The Macau Metro Monitor. November 25th, 2009
VISITORS RISE 5% TO 1.9 MILLION IN OCT macaunews.com.mo
Visitation to Macau increased 5.2% year-over-year to 1.95 million in October, one of the highest monthly arrivals numbers on record. The number of arrivals was up 15.2% month-on-month, according to the data released by the Statistics and Census Service (DSEC). Mainlanders accounted for 54.1% of all visitor arrivals last month. Year-over-year, visitation from the mainland grew 18.2%. Visitors from Hong Kong made up 28.1% of all visitor arrivals in October, down 5.1% compared to the same period last year.
ASIA PROPERTIES RELEASES MOU TERMS FOR MACAU CASINO benzinga.com
Asia Properties, Inc. released an Memorandum of Understanding “MOU” on November 17, 2009 to acquire 50.13% of Sing Hou VIP Club. The acquisition will be for 164 million newly issued restricted shares valuing the 50.13% stake at $49 million ($0.30 per share) and is expected to close by mid-January 2010. Sing Hou has over 3,000 VIP clients and is located in Star World Hotel operating baccarat gaming tables under a VIP Promoter sub-license from Galaxy Entertainment Group. API’s CEO, Daniel McKinney, explained that the company expects growth of around 10% in the Macau market for 2010.
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Investors have embraced the idea that 2010 replacements will accelerate. That may happen materially, modestly, or not at all. What will happen is slot sales to new/expanded casinos will be down big time.
We are optimistic about a potential acceleration in 2010 North American replacement demand. The industry is going to need it. Our database of new and expanded casinos shows that slot sales into these properties will decline 33% in 2010. Since both replacements and new/expansion slots should each total around 35,000 units this year, replacements need to grow more than 33% for industry unit sales to increase next year.
Replacements are a wild card while new/expansions are fairly predictable and easy to calculate, if one does the work. We do and we can say that 2010 will be choppy with positive growth by no means certain. Challenge your favorite analyst to back up his/her 2010 growth slot forecast. On a quarterly basis, Q1 2010 will be the ugliest with new/expanded units down almost 70%. The only growth quarter will be Q3, up 93%. We project Q2 and Q4 to decline 21% and 49%, respectively.
We don’t want to sound overly negative. The space looks attractive long term given the normalization of replacement demand and the likelihood of significant growth in new markets. Coming out of G2E, the sentiment was pretty positive (new markets, content) but we just want investors to be aware of the potential for some choppy results and earnings misses. IGT could be at particular risk given its reliance on slot sales and a plethora of new “wheel” products from BYI. We are less concerned with BYI’s earnings visibility due to a significant amount of deferred revenue, continued market share gains in systems, and the company’s ability to manage earnings.
It’s a quiet week for some. Yesterday the S&P 500 declined 0.1%; the NASDAQ declined 0.3%, while the higher beta Russell 2000 declined 0.4%. The S&P 500 has now closed down 4 out of the last 5 days and the Dollar Index has been lower for the past three.
The MACRO calendar continues to provide mixed signals as the momentum of the RECOVERY theme stalls. Our overall take from yesterday’s economic calendar was supportive of our concerns about the trends in the labor market and the implied health of the US consumer. Not surprisingly, the more defensive-oriented sector out performed yesterday, with the exception of Energy (XLE). Given the performance of the XLE yesterday, the Research Edge quant models are now flashing PERFECT – all nine sectors are perfect on TRADE and TREND.
Yesterday, Q3 GDP growth was revised to 2.8% vs. the previously reported gain of 3.5%. The biggest adjustments to Q3 GDP were deteriorations in the net exports and in personal consumption expenditure, reflecting a less-robust boost from the cash-for-clunkers program. In addition, consumer confidence rose to 49.5 in November from an upwardly revised 48.7 in October. The present conditions index is at a 26-year low and the labor market differential deteriorated. On the housing front, the S&P Case-Shiller index rose 0.3% month-to-month in September after a 1.1% increase in August.
Today’s MACRO calendar is full with MBA Mortgage applications, Personal income and spending, initial jobless claims, U. of Michigan confidence and new home sales--all to be reported by 10am EST.
On Tuesday, the VIX declined 3.3% and has now declined 8.7% over the past week. We are long the VXX.
While the S&P 500 was down slightly, four sectors turned in a positive performance. The best performing sector was Healthcare (XLV +0.8%), followed by Energy (XLE +0.6%), Consumer Staples (XLP +0.2%) and Utilities (XLU 0.2%). Thanks to Medtronic’s positive outlook, the Med-tech names provided the bulk of the upside, and the managed care group continues to outperform.
The worst performing sectors were Technology (XLK), Financials (XLF) and Industrials (XLI). The drag in the XLK was due to BRCD down 9% and sell-side downgrades on DELL. The XLF was being dragged down by the banks on the back of capital concerns emanating from Washington and Real Estate related names.
From a risk management standpoint, the ranges for the S&P 500, the Dollar Index and the VIX are seen in the charts below. The range for the S&P 500 is 35 points or 1% upside and 2% downside. At the time of writing the major market futures are pointing to a positive open.
Crude oil is trading basically unchanged ahead of the U.S. Energy Department inventory report. The Research Edge Quant models have the following levels for OIL – buy Trade (75.51) and Sell Trade (79.09).
Gold rose to a record $1,176.50 an ounce in the morning “fixing” in London. The Research Edge Quant models have the following levels for GOLD – buy Trade (1,143) and Sell Trade (1,189).
Copper is higher for the third time in four days as the dollar has declined for three straight days. The Research Edge Quant models have the following levels for COPPER – buy Trade (3.01) and Sell Trade (3.22).
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.