Restaurants and the business traveler

The two most recent upgrades from the sell side are based on the Business traveler traveling and taking clients out to an expensive dinner. 


From a top line perspective, clearly things have stopped getting worse and we have seen sequential improvement in sales in November.  December was the worst month of the year in 2008 so I expect to see further improvement on a YOY basis.  Importantly, same-store sales will still be down year-over-year in December.  


Morton’s, which states in its most recent 10-K that “a vast majority of its weekday revenues and a substantial portion of its weekend revenues are derived from business people using expense accounts,” saw some stabilization of trends in 3Q09; though comparable sales were still down 16.8%.  If we assume the company maintains similar 2-year average trends in the fourth quarter, comparable sales will still be down 11%-13% (better than the 20%-plus declines in the first half of the year). 


Restaurants and the business traveler - mrt


There appears to be some further evidence that business travel is recovering.  Both Delta and United said in early December that business travel is improving and that “the worst of the demand slump has ended.”  According to US Air Lines, corporate travel revenues in the U.S. are already recovering from a decline of 35% in early 2009. Revenue began improving in May, turned positive in November and now is up about 5%. 


Southwest Airlines is the lone dissenter.  Southwest’s CEO, Gary Kelly said recently, that “it hasn’t had a pickup in business demand and doesn’t expect one in 2010.”


Todd Jordan, Research Edge’s Gaming, Lodging and Leisure Analyst, thinks business travel could be fine over the near term but could disappoint beyond 1Q10.  Additionally, the new security regulations are not going to be good for business travel.  People won’t want to deal with the new headache.


The general consensus from the airlines seems to be that the business traveler is traveling.  The real question as it relates to the restaurants is whether business travelers are spending more and taking their clients out to eat which is likely reflected in the T&E spending trends at American Express.  On this front, there are signs of stabilization, but there does not seem to be a big incremental lift in spending as 2-year average trends have not yet started to move higher.  T&E volume growth turned negative in 4Q08 so the 1-year trend should look much better in 4Q09.  Assuming the same 2-year trend in the fourth quarter implies that T&E volumes will be down only 2%, which is a marked improvement from the -20% in 1H09 and -14% in 3Q09.  I will be more convinced that the business traveler is spending again once 2-year trends start to pick up but increased travel is the first step toward increased T&E spending.


Restaurants and the business traveler - amex


Offsetting some of this increased T&E spending at restaurants could be increased pressure on personal consumer spending.  Let’s not forget the impact that rising fuel prices had on marginal consumption in 2008, particularly in the summer months when gas at the pump reached $4.00.  On a YOY basis, consumers have benefited from lower gas prices for most of 2009, but with oil trading above $80.00 again, gas prices are likely moving higher in 2010.  Higher oil prices will not impact spending immediately, but we could see some impact toward the end of 1Q10 and into 2Q10.  We know that main street cannot afford higher prices at the pump as it changes the psychology of consumers and impacts how they spend discretionary dollars. 


We Got Obama Wrong

Last week I attended a Phoenix Coyotes and Vancouver Canucks NHL hockey game in beautiful Arena in Glendale, Arizona.  While many pundits have suggested that hockey can’t succeed in the desert, a house full of “howling” Coyotes fans offered contrary evidence to that thesis.  And they were rewarded, as the Coyotes beat the Canucks 3 – 2 with a shootout being the deciding factor after a spirited battle.


As many of our subscribers know full well, both Keith and I enjoy talking and writing about hockey.  After all, we are at our very roots just a couple of hockey heads from small town Canada despite our sometimes presumption to be Macro Men.  This article though is not about hockey, but about admitting a bad call.  Sports and investment research are similar in that there are accountability mechanisms associated with them.  The score board doesn’t lie and neither does “You Tube”.


As it relates to President Obama, we were wrong this year.  Coming into 2009, we set aside our partisanship and made an objective call on the man.   On January 20, 2009, we wrote:


“Undoubtedly Obama has among the more impressive oratory skills of any politician we have ever seen on the national stage and his inaugural address from just hours ago will be one that will be reflected on for months and years to come. Beyond this first speech, a significant indication of Obama’s initial success as President will be the willingness of American consumers to reassert their confidence and engage in commerce in the coming months as they did with FDR by putting their money back into the banking system.”


Our view was that President Obama’s communication skills and popularity would be a key component in any recovery.  While we admittedly have seen a recovery of sorts, it is likely hard to argue that President Obama’s ability to communicate had anything to do with it.  As the  stock market has risen from its trough earlier this year, President Obama’s approval has consistently ticked down and we have not seen a true sustained recovery in these numbers.  The inverse correlation actually suggests, perhaps perversely, that an unpopular President Obama is actually better for the markets.


While we made a bad call, at least in hindsight, we were in good company.  In the same research note we also quoted the Oracle of Omaha, Warren Buffett, who said the following about President Obama:


“He’s the absolute right commander in chief . . . You know whether it was Lincoln, Roosevelt. And, I would say Obama, you couldn’t have anybody better in charge.”


As we review President Obama’s current approval ratings, well, facts are facts, and they are just bad.  According to the Rasmussen Daily Tracking poll, President Obama  is currently rated a -16, which is the difference between strongly approve and strongly disapprove.  In the Real Clear Politics poll average, President Obama’s approval rating is 49.0, which is barely above the lowest reading of his Presidency. The day after his inaugural address, according the Real Clear Politics poll average, 63.3% of respondents approved of President Obama and 20% disapproved, which is an incredibly high rating.  Since then, President Obama has seen the quickest and largest fall in approval of any modern President.


The question is now, of course, what is next for President Obama and his potential impact on the markets and/or economy?  One point that does seem to be clear is that a sustained negative approval rating for Obama will likely have a positive influence on domestic equity markets, although at a point a dramatically negative approval rating for a U.S. President probably portends a serious crisis in confidence and a worsening economy, which will be bad for the markets.


The reality is, if President Obama wants to alter his approval rating, he will likely have to strongly signal he is changing course in terms of leadership strategy.  As we have previously suggested, replacing Treasury Secretary Tim Geithner is one obvious idea.  If it weren’t known before, it is certainly known now: Secretary Geithner represents two constituiencies, the New York banking community, over whom he presided as the President of the New York Fed, and the entrenched federal reserve system, of which he has been a member of for roughly two decades.


From a policy perspective, Obama probably needs to shift back to the middle to improve his approval rating and prevent a crisis in Presidential leadership.  As a group of economists from the University of Chicago wrote today in the Wall Street Journal:


“Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.


The efforts to transform the economy began with a fiscal stimulus package of nearly $800 billion. While some elements served the package's stated purpose and helped to soften the recession's impact, the overall package was not well designed to foster a speedy recovery or set the stage for long-term growth. Instead, the "stimulus" was oriented to sectors that liberal Democrats believe are deserving of much greater federal help. This explains why much of the stimulus money is going toward education, health, energy conservation, and other activities that would do little to soak up unemployed resources and stimulate the economy.”


In summary, recovery for President Obama, that will also be positive for equity markets and the economy, will have to come from combination of change in leadership, likely by replacing members of his cabinet, and by altering the course of the stimulus to focus on recovery needs, like lending to small business, not political wants, like green energy.



Daryl G. Jones
Managing Director

Gold Sale - I'm Out

On December the 2nd, I made a call that I titled “Bubbly Gold: Selling Some”, where I cut our position in the Asset Allocation Model from 7% to 3%. This morning I took the market’s strength as an opportunity to sell the rest. We now have a zero percent allocation to yellow rocks.


Some people say you can’t time markets. That’s probably because they can’t. I know it’s not cool to say you can do things other people can’t do in this business, but in the case of selling the top in gold, I did. Maybe that just means I am lucky. I’ll take that – it’s better than being wrong.


Two of the three Macro Themes that we currently have for Q1 of 2010 are Buck Breakout and Rate Run-up. Both of these macro themes play negative to my long standing bullish case on gold. Inclusive of my thinking that the US Dollar is setting up to chase higher alongside higher Treasury yields, is the reality that the long term TAIL line of support for gold is all the way down at $980/oz.

Currently, gold is trading in a precarious position that puts that $980 line in play – in between its immediate term TRADE line ($1137) and its intermediate term TREND line ($1081). Given my macro themes for Q1, the risk management move is to take today’s strength and sell into it.


This is now one of the most crowded macro trades in all of asset management. For now, I’m out.



Keith R. McCullough
Chief Executive Officer


Gold Sale - I'm Out - gold1


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ISM: He Who Sees No Charts?

Some people think I am trying to be funny when I call He Who Sees No Bubbles (Bernanke) names. Not calling these v-bottom charts in macro for what they are isn’t funny at all. For those who continue to be willfully blind, it’s just professionally embarrassing.


Below, we have attached the latest readings on from the ISM: the Manufacturing Index and Prices Paid.

  1. ISM Manufacturing for December just made another higher-high at 55.9 (versus 53.6 in November).
  2. Prices Paid continue to ramp, coming in at 61.5 in December (versus 55 in November).

On the ISM Manufacturing reading, never mind 2008, this chart is comfortably higher now than where it was in late 2007.


On the Prices Paid survey, is it still below the 2008 highs? Yes, but remember that those highs also carried $152/barrel oil prices!


In the Virtual Portfolio we bought the US Dollar today. He Who Sees No Charts (Bernanke)  is running out of pictures that both the bond and currency markets want to ignore. Yields across the Treasury curve continue to breakout to the upside. The US Dollar is on sale today, but holding its new intermediate term TREND line of support ($76.31).



Keith R. McCullough
Chief Executive Officer


ISM: He Who Sees No Charts? - ISM1


ISM: He Who Sees No Charts? - ISM2


US STRATEGY – Popping Bubbles

US equities finished lower in their final day of trading for 2009 with the Dow declining (0.87%), the S&P down (1.01%), the NASDAQ (0.72%) and the Russell (1.37%).  Last Thursday, the Industrials (XLI) and Consumer Staples (XLP) joined the Financials (XLF) and are now broken on TREND.   


In the last week of trading for the year the S&P 500 declined 1.0%.  On the MACRO calendar the week's economic data points included: the October S&P Case-Shiller 20-city home price index, December consumer confidence, December Chicago PMI and weekly initial claims; all came in better than expectations.  There was nothing in the MACRO data points to account for a shift in sentiment surrounding the momentum behind the RECOVERY theme.


Corporate news flow was again on the light side last Thursday, with the Jobless claims data the only release of interest on the economic calendar. Initial claims fell 22,000 to 432,000 in the week-ended December 26th; the lowest level since July of 2008 and below the 460,000 consensus. The four-week moving average fell to 460,000 from 466,000 the week before. 


The MACRO data points out of China continue to be a net positive; we believe that things will slow as we move thru the first quarter.  In China, the official purchasing managers index improved to 56.6 last month up from 55.2 in the previous month.  China's manufacturing sector is now expanding at the fastest pace since the financial crisis in late 2008.  The index’s low was at 38.8 in November 2008.  Domestically, we are looking for additional data points on the RECOVERY theme with the release of December ISM manufacturing. 


The Utilities (XLU) and the Materials (XLB) sectors were the two worst performers last Thursday, with the Road (R) and Air Freight (FDX) names performing the worst.  Financials (XLF) and Energy (XLE) were the best relative performers, with the larger-cap banks (WFC) and brokers (GS) among the standouts.  Every sector declined last Thursday. 


Last Thursday, the VIX closed at 21.68, up 8.6% day-over-day; last year the VIX declined 44.7%.  The Dollar Index traded in a tight range last week, and was down 4.2% for all of 2009. 


Today, the range for the S&P 500 is 22 points or 2.0% upside and 1.0% downside.  At the time of writing the major market futures are trading higher.    


Copper is trading higher for a sixth day in London to a 16-month high as a strike began at the world’s second-biggest mine and manufacturing in China expanded by the most in five years. 


In early trading today GOLD is trading in a narrow range around $1,095/OZ an ounce on Monday in a cautious start to the year after ending 2009 with their biggest absolute annual gain in three decades. 


Crude oil rose for an eighth day, trading above $80 a barrel for the first time in seven weeks, as freezing weather and improving economic prospects around the world helped the outlook for demand. 


Howard Penney

Managing Director


US STRATEGY – Popping Bubbles - hp1


How Fitting

“Wide acceptance of an idea is not proof of its validity.”
-Dan Brown (The Lost Symbol)
I’ve decided to preface my first note of 2010 with a quote from the author of the Da Vinci Code. Dan Brown’s latest thriller, The Lost Symbol, is set in Washington, D.C. How fitting…
That’s exactly where He Who Sees No Bubbles (Ben Bernanke) has staged his storytelling since he joined the US Federal Reserve as a governor in 2002. Ever since, the man, the myth, the legend - of everything Great Depressionista - has been politicizing monetary policy with a mandate to keep the real rate of return on American savings accounts at zero.
Clearly, Harvard University symbologist, Robert Langdon, wasn’t invited (it was more of a Groupthink Inc. event), but there were plenty of revisionist historians who assembled at the American Economic Association’s conference in Atlanta yesterday. The Bloomberg headline coming out of the meeting was, “Bernanke Says Low Rates Didn’t Cause House Bubble; Regulation Best Answer.” How fitting …
Heck, maybe that’s the best call we can make on 2010. Those with Perceived Wisdom of how the US Financial System works are just going to keep making stuff up! Greenspan and Bernanke cutting rates to zero, twice, didn’t create any debt levered priced bubbles. Take their word for it!
We shouldn’t just pick on He Who Sees No Bubbles in 2010. That would be mean. My new year’s resolution is to spread the love. There were multiple members of Groupthink Inc. at the storytelling event in Atlanta yesterday, and here are two of the most representative conclusions that this consistently inaccurate group of wise men came up with:
1.      “It is not likely that we have robust growth anytime soon” –Joseph Stiglitz

2.      “Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual.” – Donald Kohn

Donald Kohn is a much more accomplished storyteller for the Fed than Bernanke. He has been an economist supporting cut-to-zero bailout policies, well, since they were invented. Having seen none of this coming, he is now the Fed’s Vice Chairman. He apparently sees no reason to agree with me (or 99% of Americans who earn fixed incomes from their savings accounts) that consumer spending is being constrained by the Fed giving us ZERO return on our money.
This is where the Fed’s unscientific narrative is dead wrong:
1.      That we need more debt and credit to fix our debtor nation problem.

2.      That we silly people who save wouldn’t know what to do with a risk free rate of return if we ever see it again.

3.      That main street inflation with $81/barrel oil and $3.34/lbs copper is nowhere to be seen.

In September of 2007, the Fed Funds Rate was 5.25%. We need to get at least half way back to that rate, over time, unless we want to become Japan. Savings build investment dollars. More investment dollars put into the hands of hard working American entrepreneurs is what builds the next Google or Nike. The Big Government Decade we just experienced failed. “Wide acceptance of an idea” that we need to fear rates hikes “is not proof of its validity.”
Two of our three Macro Investment Themes for 2010 are Buck Breakout and Rate Run-up. Both of these themes are correlated. Both of these themes stand on the other side of the two aforementioned quotes coming out of Groupthink Inc.

Sorry Mr. Stiglitz, reported growth is going to be robust for at least the next 6 months (Q4 and Q1 GDP). At the same time, reported inflation is going to continue to rise, as will asset prices. The US Dollar is breaking out to the upside as a leading indicator that the Fed Heads are staring in the rear-view mirror again.
At the same time, yields across the US Treasury curve are also breaking out across all three of my key investment durations (TRADE, TREND and TAIL). The long term TAIL breakout levels for 2-year and 10-year Treasury yields are 0.96% and 3.29%, respectively.
My intermediate term TREND lines (3 months or more) of support for the US Dollar and the SP500 are $76.31 and 1081, respectively. Provided that those two lines hold and the aforementioned move in the bond market continues to confirm higher-highs in the prices of copper and oil this morning, the Fed will remain behind the curve.
In 2009, they called for emergency levels of zero percent rates because we were in a “Depression.” The Fed has it wrong again already in 2010. How fitting…
Best of luck out there today,




XLV – SPDR Healthcare
Buying back the bullish position Tom Tobin and his team maintain on the intermediate TREND term for the Healthcare sector.

VXX - iPath S&P500 VolatilityFor a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

EWG - iShares Germany
Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

GLD - SPDR GoldWe 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.


RSX – Market Vectors Russia
We shorted Russia on 12/18 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.

EWJ - iShares JapanWhile 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.

XLY - SPDR Consumer Discretionary We shorted Howard Penney's view on Consumer Discretionary stocks on 10/30 and 12/2.

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.

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