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Going After Gold

“You wanna settle old scores, you're on the wrong team. We move forward starting right now.”
-Herb Brooks (Miracle)
Tonight, in Saskatoon, Saskatchewan, Canada will face-off against a young American team in the gold medal game of the World Junior Hockey Championship. The Canadians will have the edge with the home crowd behind them, but we men and women of the ice never, ever, underestimate the US National Team’s potential for a Miracle On Ice.
For Americans and Canadians investors alike, going for gold in 2010 is as consensus as consensus gets. Thankfully, I have been a gold bull since 2003. That score means nothing to me this morning. It’s a new season, with a new score. On this research bench, if “you want to settle old scores, you are on the wrong team.”
Today, we move forward. We have moved to a zero percent position in our Asset Allocation Model in Gold. Are we early? Maybe. I have immediate term TRADE resistance for the price of gold at $1137 – but I sold into the biggest up day gold has had since November 3rd (+2.3%), and I like being early.
I wrote an intraday note to our Macro Subscribers on December 2nd titled “Bubbly Gold: Selling Some, Again!” – that wasn’t early. That was, as they say on the ponds of Thunder Bay, “ticklin’ the twine”…
The top right corner of the twine, net, or chart, is the same thing. For the foreseeable future, you cannot get the puck, or the gold price, stuffed any higher than that. A decade high for the price of gold was established on December 2nd of 2009. Mark that date down. You might not see a higher-high for gold until the Fed stops raising interest rates.
Raising rates? Huh? Knuckle head hockey boy – Goldman says the Fed is on hold until their 2012 banker bonus season. We’re long of gold and levering up returns for some free moneys, eh.
That, hockey fans, would be the consensus view for 2010. Actually, throw “Long China” onto that bucket of consensus ice too (after an +80% run in 2009, Goldman is also saying buy China right here this morning as well). Sorry to keep score guys – but there’s a new chirper in this league. Game on.
My research team remains outside of consensus on all 3 of our core Macro Themes for Q1 of 2010. As a refresher, here they are:
1.      Buck Breakout

2.      Rate Run-up

3.      Chinese Ox In A Box

We authored the “Breaking” and “Burning” The Buck thesis early last year, so we think we have some credibility in calling the turn on our own bearish US Dollar thesis. We aren’t making this call for the sake of being contrarian. We are making it because we think we have an increasing probability of being right.
We put our bucks where our mouths were yesterday and bought the UUP (Dollar ETF) in our Virtual Portfolio. We also sold our position in Gold (GLD). Both of these moves are born out of the same investment thesis. He Who Sees No Bubbles (Bernanke) is way behind the yield curve. Consensus that he will remain asleep at the switch for another full year of Obama getting blamed for funding banker bonuses is politically reckless, at best.
Politically reckless? Pardon? What do intermediate term breakouts in both US Dollars and Treasury yields have to do with politics? Answer: Everything.
As Herb Brooks would say, “Again!” … “Again!”. Forget the new normal folks, we came up with The New Reality before that low growth, low rates, thesis started getting parroted by the CNBC plebes. “Again!”, The New Reality is that US monetary policy is as politicized as it has ever been. Ever, by our math, is a very long time.
Last week, saw the Piggy Banker Spread (yield spread between 10 and 2-year interest rates) hit its widest margin EVER. At the same time, you saw the US stock market hitting its highest of highs for the year. And, at the same time, you saw President Obama’s approval ratings hit some of the lowest levels ever in an environment of expeditiously rising stock prices.
You don’t need a puck to the melon to wake-up to the political conclusion that the President of the United States needs a big political win here in 2010. It’s not coming from Healthcare or Afghanistan either. Ask Hillary and Bill about that. The turn-coats are moving in on the Obama Hammer. This top political draft pick of 2009 needs to put one in the back of the net, and soon.
We think that political win comes against the bankers. We think the best way to ensure that populist win is to raise the rates of return on American savings accounts.
Forget “extended and exceptional.” ZERO rate of return being issued to the US citizenry is unreasonable and unsustainable. As soon as Ben Bernanke gets re-confirmed as Fed Head by the Senate, look for Obama to be having a little fire-side chat with He Who Has Great Depression about the same.
Our job is to wake-up every morning and manage risk, not to make friends. Sell your gold. Buy some dollars. “We move forward starting right now.”
My immediate term support and resistance levels for the SP500 are now 1123 and 1135, respectively.
Best of luck out there today,


UUP – PowerShares US Dollar Index Fund
We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

XLV – SPDR HealthcareBuying 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 12/14/09.

EWG - iShares GermanyBuying 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 12/8/09 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.

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 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.

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.

XLY - SPDR Consumer Discretionary We shorted Howard Penney's view on Consumer Discretionary stocks on 10/30/09 and 12/2/09.

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.


A vote on gaming legislation in Brazil probably won't occur until the spring, at the earliest.



As we wrote about in our 12/18/09 post, "SIZING UP THE BRAZIL OPPORTUNITY", the Brazilian federal government is considering gaming legislation.  The proposed legislation, Bill No. 270/03, would legalize licensed bingo and electronic gaming machines and allow for gaming parlors with 20-40 devices in some of Brazil's larger cities and a maximum number of 75 devices per location in Sao Paulo.  We believe the market could be at least 40,000 machines


In mid-September 2009, a draft version of Bill 270/03 passed in the Chamber of Deputies by a 40-to-7 vote.  The Bill is now awaiting debate and vote in the lower house of the Brazilian Congress.  While the Bill was given the green light to go to floor a few weeks ago, it appears that the debate has been delayed because of a provision dealing with the retirement age of public servants that was tacked onto Bill 270/03.  There may be other issues since we are now hearing no vote until the spring, at the earliest.


The October presidential election is the key time frame.  Our sources indicate the likelihood of a successful vote diminishes post election.


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














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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).



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. 


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