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US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE?

WHAT A DAY! - The S&P rallied 1.2% yesterday; the DOW was up 1.2%, the NASDAQ up 1.5% and the Russell 2000 up 1.6%. The strength was broad based with every sector outperforming the S&P 500 except for the Financials (XLF), which was down for most of the day. 

 

The MACRO calendar benefited the RECOVERY trade, which dominated the mood of the market yesterday.  The reality is that the SAFETY trade outperformed.  The best performing sector was Materials (the RECOVERY trade), but Utilities and Healthcare outperformed too, which suggests a flight to safety.  In addition, the underperformance of the Financials suggests a move away from RISK.  

 

That being said, the market’s upward momentum was driven by data from the manufacturing sector, which was a key driver for the RECOVERY theme.  Over night the focus was on China, where the manufacturing sector expanded for a ninth straight month in November.  In the US, the manufacturing sector expanded for a fourth straight month in November.  Some additional support came from the 3.7% month-to-month increase in October pending home sales, which marked the ninth consecutive monthly gain and pushed the index to its highest level since March of 2006.  As a result, the XHB +2.2% (the homebuilder ETF), outperformed the S&P 500.

 

The appetite for risk accelerated with the VIX down 10.6% on the day.  The potential for a Dubai contagion is slipping into the past as the dollar sold off 0.69% to 74.36 yesterday.  The “broken buck” continues to have favorable implications for the RECOVERY trade as the Materials (XLB) was the best performing sector on the day, up 1.9%.  Within the XLB the outperformance was driven by steel, copper, aluminum, and paper and forest product names. 

 

As I mentioned above, yesterday every sector outperformed the S&P 500 except the Financials (XLF).   The Financials have been chronic underperformers over the past three months and over the past 5 trading days are down 0.2% versus the S&P up 0.3%.  The XLF continues to underperform despite the better-than-expected economic data and an increased appetite for risk.  Dragging the XLF down are the larger names in the index like JPM, GS, C and AXP.  What’s wrong with the XLF?

 

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 2.5% downside.  At the time of writing the major market futures are trading slightly lower.

 

Crude is trading down today after the American Petroleum Institute reported crude inventories rose 2.89 million barrels last week, while gasoline and distillate fuel stockpiles also climbed.   The Research Edge Quant models have the following levels for OIL – buy Trade (75.31) and Sell Trade (78.69).

 

Gold climbed as much as 1.4% to a record $1,213.88 per ounce in Singapore. The Research Edge Quant models have the following levels for GOLD – buy Trade (1,170) and Sell Trade (1,224).

 

Copper fell in London trading, erasing an earlier gain to more than a 14-month high.  Copper for three-month delivery on the London Metal Exchange fell 0.1% to $7,068 a metric ton.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.08) and Sell Trade (3.23). 

 

Howard Penney

Managing Director

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - sp1

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - usdx2

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - vix3

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - oil4

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - gold5

 

US STRATEGY – WAS IT A RECOVERY TRADE OR SAFETY TRADE? - copper6

 


THE M3: NOV GAMING RECEIPTS, OCT CONSUMER PRICES

The Macau Metro Monitor.  December 2nd, 2009.

 

 

MACAU’S GAMING RECEIPTS RISE 60% IN NOVEMBER macaunews.com.mo

Macau’s casinos generated “a little more than” MOP 12 billion (US$1.5 billion) in gross gaming receipts in November, an increase of approximately 60% compared to November 2008, according to a source cited by The Macau Post Daily.  According to the source, gaming gross receipts during the first eleven months of the year rose approximately 6% compared to the same period of last year.  SJM remains the market leader with 35% market share, followed by LVS. 

 

 

 

MACAU OCTOBER CONSUMER PRICES FALL ON YEAR forextv.com

Consumer prices in Macau dropped 1.1% year-over-year in October, according to data released by the Statistics and Census Service.  On a month-over-month basis, consumer prices were up 0.3% in October.  In the first ten months of the year, the consumer price index grew 1.4% over the same period last year.


MCD – Perspective on the executive changes

After the close, MCD announced that Ralph Alvarez has decided to retire as President and COO for health related reasons.  Importantly, Mr. Alvarez was the clear heir apparent to become the next CEO of MCD.  While I can personally sympathize with his orthopedic issues, his sudden resignation and stepping down from the board of directors seems somewhat odd.

 

To put this resignation in context there are some things to consider:

 

(1)    On December 8th MCD will report its second straight months of declining same-store sales in the USA.

 

(2)    I continue to contend that the largest new product in the history of the company (McCafe) is not going well, but it might be too early for someone to take the fall for this.  Think Don Thompson!

 

(3)    If he was such a great asset to the company why is he leaving the board?

 

(4)    There is a big void to be filled by his potential replacement!  I’m betting on Denis Hennequin, President of McDonald’s Europe!

 

(5)    MCD accelerated unit growth in Europe and MCD’s Europe Chief Financial Officer Jerome Tafani  said, "the trend in sales

we have seen up until October is not going to change in the coming months." 

 

Despite Ralph’s personal headwinds the timing and magnitude of this move does not completely rest comfortable with me. 

 

We will have our estimates for MCD November sales trends out shortly.   


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CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS

Nearly every restaurant operator is benefiting from lower food costs, so what is the differentiator to any given stocks’ outperformance – top line sales!

 

In the second half of 2009 to date, the casual dining stocks as a group have declined 7.6%, excluding Landry’s performance, which is up nearly 150% as a result of CEO Tilman Fertitta’s purchase offer and Pershing Square’s subsequently taking a 9.9% stake in the company.  Outside of LNY, the top performers since June 30, 2009 have been (in order of best to worst) CBRL, BWLD, CAKE, PFCB and BJRI.  These are also the only names in the casual dining group that have posted positive stock performance thus far in 2H09, which represents a big shift from the first half of the year when only LNY’s stock declined from December 31, 2008 with the group, on average, up nearly 84%. 

 

When I looked at this list of outperformers in 2H09 to date, the first thing that jumped out at me was the fact that three of the names have a high concentration of their restaurant base in California with CAKE at nearly 20%, PFCB at about 16% and BJRI at over 50%.  Based on what we have heard about recent trends in California, particularly as it relates to the 12%-plus unemployment rate in the state, it is somewhat surprising that these California-centric names have outperformed.

 

The more important similarity among the group is, however, that despite some of these companies’ exposure to California, all of these names, except for one, have outperformed the industry benchmark on a comparable sales basis as reported by Malcolm Knapp in the most recent quarters (as shown in the attached charts below).  We all know the industry performance is not good, but having less bad results points to share gains and helps to explain, for the most part, the companies’ relative stock performance.

 

CBRL, which is up nearly 35% since June 30, continues to widen its gap to Knapp, outperforming by more than 6% in it last two reported quarters.

 

BWLD’s (up 22.8% over the same timeframe) gap to Knapp has come in somewhat in the last couple of quarters but the company still posted same-store sales trends that were 7.6% better than the industry average in 3Q09.

 

CAKE, up 8.8%, has not outperformed the industry average by the same magnitude as CBRL and BWLD, but the company has performed better than the average in each reported quarter of 2009 (by an increasing amount each quarter) after underperforming the average for all of 2008.

 

BJRI, up 1.2%, has maintained its 5%-plus gap to Knapp in the last two reported quarters despite the sequential decline in its same-store sales growth trends on both a 1-year and 2-year average basis.

 

So who does that leave out?  PFCB is up 1.7% in 2H09 to date and is the only casual dining name (again outside of LNY) that has posted positive price performance since June 30 with same-store sales trends at its main concept (the Bistro) that are underperforming the industry benchmark.  And, that underperformance increased by about 150 bps in 3Q09 on sequential basis from 2Q09.  Same-store sales growth in 3Q09 decelerated sequentially from 2Q09 on both a 1-year and 2-year average basis. 

 

Some might point to the improved margin trends at Pei Wei and to the concept’s recent same-store sales outperformance to explain the company’s relative stock performance, but it is important to remember that the Bistro still accounts for about 75% of total company sales.  There is no reason to believe that Bistro trends will turnaround prior to the industry so I do not think it is reasonable to believe that PFCB will be able to maintain this stock price outperformance much longer. 

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - CBRL gap to knapp

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - BWLD gap to knapp

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - CAKE gap to knapp

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - BJRI gap to knapp

 

CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS - PFCB gap to knapp


HOLIDAY PARTY INVITE

The Research Edge Consumer Team is hosting a Holiday Party on December 9th

 

 

Please join the Research Edge Consumer Team for Holiday cocktails in Midtown on December 9th.  It’s hard to believe another year has almost passed and as a result it’s time to celebrate!  In appreciation of your support throughout the year, we look forward to seeing you at Bar 44 (located in the lobby of the Royalton Hotel, 44 West 44 Street b/t 5th and 6th).  Please stop by at any time between 6:30-8:30pm.  We will have an area reserved on the right side of entrance across from the lobby bar.

 

If you are able to join us, kindly RSVP by Dec 7th. We look forward to seeing you next week.

 

 

Research Edge Consumer Team,

Todd, Anna, Brian, Eric, and Howard


RESETTING EXPECTATIONS

As the story goes according to the Fed, inflation is under control, productivity is improving, not withstanding Friday’s minor blip, there have been no major setbacks for the US market since March 9th, the dollar’s decline is orderly, home prices are generally on the mend and unemployment is high across the country but initial jobless claims appear to be less than toxic.  Even better, there appears to be unlimited demand for US government debt at the lowest yields on record.  

 

This appears to be the recipe for keeping the market rocketing ahead. 

 

As Keith said in today’s Early Look – “Remember, when it comes to keeping rates unreasonably low for an unsustainable amount of time, ‘to go beyond is as wrong as to fall short.’ It’s time for He Who Sees No Bubbles to pull up a price chart of gold, the Yen, or short term US Treasuries this morning and wake up.”

 

With the market making higher highs, I ask myself, is it me or does the market need to reset the most basic relationship between inflation and the structural/secular trends imbedded in today’s prices or does the “new normal” make the old theories and old relationships meaningless in today’s environment?

 

One thing that has not changed during the recent “boom-to bust” market cycle is that demand elasticity is incredibly high, even for non-discretionary items, such as gasoline and food, and prices for both are rising—that is inflationary!

 

One rule that will not change is that the burning buck is inflationary.  Look no further than two non-discretionary items – gas and food. 

 

The consumer is not dumb! 

 

Howard W. Penney

Managing Director

 

RESETTING EXPECTATIONS - fg1

 


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