The S&P 500 started out the new decade on a strong note on Monday, with the index up 1.6%.  The rally was broad based as all the major indices finished at least 1.5% higher on the day.  The Research Edge quant models now have all nine sectors positive on TRADE and TREND. It should be noted that the move came on very light volume.


On the MACRO front there were a number of positive dynamics at work yesterday, including a batch of largely upbeat global PMI readings, particularly out of China and the US.  The improved PMI readings led to a big move in the high beta RECOVERY trade.  The official December Chinese PMI rose to 56.6 from 55.2 in November, expanding for the tenth straight and marking the highest level since April of 2008. In the US, ISM manufacturing rose to 55.9 in December from 53.6 in November, the highest level since April of 2006. December marked the fifth consecutive month of manufacturing expansion. Importantly, the forward-looking new orders component rose to 65.5 from 60.3. 


The two best performing sectors were Energy (XLE) and Materials (XLB).  Both sectors have the most leverage to the RECOVERY theme and a weaker dollar.  The Dollar index declined to 77.52, down 0.43%. 


Rounding out the top three best performing sectors was the Financials (XLF).  The XLF posted its best one-day gain since November 30, 2009.  Within the XLF, the banks snapped a four-day losing streak.


Next to the Utilities, the two notable underperformers were the Consumer Staples (XLP) and Consumer Discretionary (XLY).  The retail group was a notable standout with the S&P Retail Index finishing unchanged on the day. 


The range for the S&P 500 is 12 points or 0.5% upside and 1.0% downside.  At the time of writing the major market futures are trading flat on the day.    


Copper is trading lower ending a sixth day winning streak.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.25) and Sell Trade (3.42).


GOLD continues to trade in a very narrow range around $1,127/OZ.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,083) and Sell Trade (1,137).


Crude oil traded near a 14-month high as cold weather in the U.S. and signs of economic recovery are helping demand.  The Research Edge Quant models have the following levels for OIL – buy Trade (77.85) and Sell Trade (82.59).


Howard Penney

Managing Director















The Macau Metro Monitor.  January 5th, 2009


Macau’s gaming industry logged gross gaming receipts of US$ 14.875 billion (MOP 119 billion) in 2009, according to an article in the Macau Post Daily.  The revenues represent an increase of 9.4% on the previous year’s total of US$ 13.6 billion (MOP 108.8 billion), which was 31% higher than the 2007 total.  Last month’s casino receipts amounted to US$ 1.4 billion (MOP 11.3 billion), an increase of 47.6% compared to December of 2008.  Month-over-month, revenues were up 50% in December.

The relatively low annual increase has been attributed to the impact of the global economic downturn as well as visa restrictions enforced on mainlanders by the central government.  According to the unnamed source in the Macau Post Daily’s report, SJM has remained the top market share holder with 30% of revenues.  LVS came in second at 23% with WYNN at 15%, MPEL at 12%, and Galaxy and MGM at approximately 11% and 9%, respectively.




Shares of Macau casino operators rose on Tuesday on reports that gambling revenues in the enclave in December rose 48 percent from a year earlier, signalling sustained growth in the world's largest gambling market.




There are no influenza A (H1N1) patients in Macau hospitals, the Health Bureau reported yesterday. While the Government is urging residents to receive the flu vaccination, up to 65,000 citizens already have had the jab.  The warning of pandemic influenza provided by the World Health Organization (WHO) remains at level 6 – moderate. Currently, the alert level issued in Macau is also 6 (blue), and the risk of transmission is moderate.  As of yesterday afternoon, no new confirmed cases of people suffering H1N1 and needing hospitalization were reported. The last confirmed patients hospitalized reported by the Government have been discharged, and no new patients have been hospitalized.


SONC is scheduled to report fiscal first quarter 2010 results after the close today.  I think earnings could come in slightly better than the street’s $0.14 earnings per share estimate.  I don’t think investors will care too much about that number, however.  What will matter is what management has to say about top-line trends in the quarter and going forward.  Management told us during its fiscal 4Q09 earnings call that the first quarter did not start out strong as a result of “challenging weather” and that statement was made more than six weeks into the quarter. 


To that end, my partner drive-in same-store sales growth estimate of -5% comes in below the street’s -4.6% estimate and assumes no acceleration in 2-year average trends from the fourth quarter.  As in the most recent quarters, I am expecting most of this decline in same-store sales to be driven by continued weakening of average check.  This will be the case until the company laps the launch of its Everyday Value Menu in 2Q10. 


My more bullish stance on SONC is based largely on the fact that the company’s margins are moving higher in fiscal 2010.  Based on what we have been hearing from SONC’s peers, QSR trends are under increased pressure and SONC’s full-year same-store sales guidance for flat growth currently seems like a bit of a stretch.  For reference, management admitted that it might need to revisit this guidance, which was given in September, after 1Q10. 


Even if top-line numbers come in light (I am modeling -2% for the full year), EBIT margins should improve more than 250 bps during the year to a level more consistent with what the company achieved prior to fiscal 2008, with the biggest improvement coming in the first half of the year.  SONC is lapping extremely easy margin comparisons in the first half of the year as a result of the 6%-plus declines in partner drive-in comparable sales in 1H08, but the company’s refranchising initiative (refranchised 205 restaurants in FY09) will help a lot in this regard as well. 


Management is expecting food costs to be relatively flat as a percentage of revenues for the full year.  Although this guidance could be at risk as food costs have moved higher since this guidance was given and the company was still in the process of negotiating contract renewals, SONC was largely locked in on its food and packaging costs through the first quarter.  The company’s refranchising efforts should benefit both the labor and other operating expense line, particularly in the first half of the year; though this will be somewhat offset by continued sales deleveraging.


My full-year same-store sales estimate of -2% does assume some improvement in 2-year trends for the balance of the year so there is some risk to my numbers, but margins are moving higher even if it is not to the magnitude I have laid out.  Offsetting some of the top-line risk to earnings is the fact that SONC started the year with $125 million in excess cash investments over and above what the company calls its normal operating needs.  Management said it will use this money along with its free cash flow (I am modeling more than $120 million) to continue to pay down debt and increase shareholder value, which it said could include share buybacks.  My earnings estimates do not currently reflect the benefit of share repurchase.  I continue to believe that the company’s return on incremental invested capital bottomed in fiscal 2009, which should help SONC to outperform its peers going forward after consistently underperforming its peers in calendar 2009 (down 21% in the last year relative to its QSR peers’ average nearly 70% move higher).



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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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