If last year is a good indication of what to expect, I am assuming that most of the news flow out of the two conferences will be more qualitative than quantitative. 


Next week will be a busy week for restaurants.  Between the Cowen and Company Consumer Conference earlier in the week and the ICR XChange Conference starting mid-week, we will hear from the management teams of about 25 public restaurant companies and a handful of private restaurant companies as well.  Domino’s is also hosting an investor day on Wednesday.


Last year, BJRI, TAST and CPKI preannounced 4Q numbers in conjunction with these conferences (KONA preannounced 2 years ago).  We already got BJRI yesterday after the close.  For the most part, the balance of the companies presenting did not put out any press release on the days leading up to the conference last year, except to give the time and date of their presentations.


If last year is a good indication of what to expect, I am assuming that most of the news flow out the two conferences will be more qualitative than quantitative.  I wish I had counted the number of times management used the word challenging last year so that I could compare it to this year and use it to gauge the current demand environment versus last year.   I am only half serious, but I do think the general tone of next week’s presentations will be more telling than anything else.

We heard from SONC, CKR and RT already this week so I am not expecting anything incremental out of any of these companies’ presentations. 


Instead, I think the trends discussed by all of these companies this week will help to dictate the line of investor questioning next week.  Specifically, I think investors will be interested in hearing about the current environment as it relates to the level of industry discounting, average check declines, regional performance (particularly in Texas), QSR’s slowing trends, the impact of weather on trends in December, whether the improvement in November casual dining trends has held up and whether we are yet getting closer to demand recovery.


Last year, PFCB’s Co-CEO Bert Vivian gave one of the more memorable presentations as he provided what I viewed as a rather dire outlook for the casual dining industry.  PFCB will be presenting again next week and although the company’s press release does not specify which executive(s) will be at the conference (I am hoping for Mr. Vivian), I will be listening to see if there is any change in the company’s tone.  Below I included some of Mr. Vivian’s comments from last year.


I am not expecting any one company to make as many colorful and telling comments as Mr. Vivian did last year, but I think all of the presentations together should provide us with a better idea of how the industry is faring.  I am looking forward to learning this year’s new favorite word among restaurant management teams…my guess is volatile.


From 1/13/09:




Bert Vivian, PFCB’s new co-CEO as of earlier this month, presented at an investor conference this morning and spoke rather generally about current trends in casual dining.  While his commentary is entertaining, he did not paint a very optimistic picture.


Below are some of his comments (I am paraphrasing):


Casual dining has been ugly and it is going to continue to get uglier.

The lights went out on December retail same-store sales…This is not just a retail problem.

Yesterday, RUTH reported that comparable sales declined over 18% for the fourth quarter. Don’t be surprised by these types of numbers. Whatever numbers you are expecting for the industry should most likely be ratcheted down.

During the fourth quarter, particularly in December, people had a reason to go out shopping. When people are out, they occasionally also go out to eat. We see no reason for people to go out in 1Q. It is going to be a cold 1Q in retail and restaurants. There is nothing to change people’s behaviors in the next few months.

This is a tough sales environment. 2009 for our group is going to be a throw away.

There is no need to be in a hurry with this group. There is nothing we see that makes us think business is going to take off any time soon.

The casual dining group’s decline in development in 2009 is likely going to stretch out into 2010 because once the hammers stop, it is tough to get them going again. (This might have been the most positive thing Bert said as it relates to really fixing one of the biggest fundamental problems facing the group as a whole).

Below are some of Bert’s more positive comments:

In the past, PFCB has used its free cash flow to build new restaurants. With the slowdown in development, this is not going to be true for this year and most likely for the next few years. What do we do with our free cash flow? (Bert answered his own question, saying that PFCB will most like use its cash to pay down debt and buy back shares.)

The sun will shine again on this group…We just don’t know when.

The current market cap of all of the higher-end steak players combined suggests that people are not going to eat steak anymore…I am going to continue to eat steak.

People are going to continue to eat out. The casual dining business is not going away. There are going to be casualties, but there are also going to be survivors. 2009 is going to be a tough year, but PFCB will be one of the survivors and should come out a stronger company.


Our proprietary December property data indicate very strong results for Wynn Macau.  Numbers should go higher.



Total Macau table gaming revenue increased 44%, 63%, and 49% in the Q4 months of October, November, and December, respectively.  As we wrote about yesterday, Wynn Macau was a clear standout in December, more than reversing year-over-year market share declines in previous months.  Market share was up in both VIP and Mass and it wasn’t significantly impacted by hold percentage.  One month a trend does not make but this is encouraging.  The following chart shows Wynn’s monthly market share in Macau.




On a year-over-year basis, Wynn Macau generated a 71% increase in table revenue, up 85% and 29% in the VIP and Mass segments, respectively.  For Q4, table revenues at the property climbed 34%, much better than we had projected.  The following chart details the monthly y-o-y change in Wynn Macau’s VIP, Mass, and total table revenues.




So what does this do to our numbers?  Not surprisingly, they go up!  We are now projecting company EBITDA of $197 million versus the Street at $183 million.  For Wynn Macau, we estimate EBITDA of $145 million ($117 million after corporate allocations and royalty fees).


I’m still bullish on Macau over the near-term but I’m growing more cautious particularly since our macro and international guru, Keith McCullough, is getting negative on the sequential China economic trends.  Those trends matter when it comes to the VIP business, which may be in a bubble.  The supply situation must be also monitored given the 20%+ Mass table game supply increases for much of this year.  It’s tough to call a top on the Macau names so incorporating a momentum and catalyst driven approach on these stocks is probably appropriate.  Valuation seems to matter less.


Earlier this week, I said that there appears to be a divergence of trends between QSR and Casual Dining (please see my January 6th post titled “RESTAURANT INDUSTRY – GLIMPSE AT DECEMBER”).  To that end, the chart below highlights the downward trend in QSR same-store sales growth in the U.S., with trends turning negative in the last three reported quarters and 2-year average trends coming in flat and -1% in 2Q09 and 3Q09, respectively.  Based on the recent news flow out of SONC and CKR, I would expect these trends to continue in 4Q09.


As I have said before, 16-19 year olds are an extremely important demographic for QSR operators and as the chart shows, the increasing rate of unemployment among this age group since 2Q08 has taken its toll on QSR demand.  Restaurant management teams across the industry have cited higher unemployment as the primary cause of weaker demand, but QSR operators have been more vocal about how the even higher rate of unemployment among its younger, core users has hurt trends.  Specifically, JACK management stated on its last earnings call, “In addition, unemployment rates for our core customer demographic which skews towards young males and Hispanics are substantially higher than the overall rates. According to the Department of Labor, on a seasonally adjusted basis, 16 to 24 year olds had a very rough summer in 2009, with fewer than 50% working.” 


The unemployment numbers for this key demographic came down slightly in November on a sequential basis from October, which on the margin, is good.  I think the industry will be in a much healthier position, however, once these numbers come back down to pre-2Q08 levels.


QSR – I’LL TAKE ONE JOB, HOLD THE BURGER - 1 8 2010 10 41 50 AM


QSR – I’LL TAKE ONE JOB, HOLD THE BURGER - unemployment by age 16 19


The Macau Metro Monitor.  January 8th, 2010.


4.25 million passengers passed through the Macau airport in 2009, a 16.6% decline compared to the previous year.  During the same period, according the chairman of the Macau International Airport Company, 52,000 tons of cargo and 40,000 aircraft movements were recorded.  Compared to 2008, cargo and the number of flight movements were down 48% and 20%, respectively. 




Viva Macau Airlines has partnered with City of Dreams to offer exclusive privileges for passengers.  Viva Macau passengers flying until the 31st of March will be entitled to exclusive entertainment privileges at City of Dreams.  Passengers will be entitled to HK$500 worth of entertainment vouchers/credits for use in the COD casino and selected food and beverage outlets.


Viva Macau Airlines currently flies direct from Macau to Ho Chi Minh City, Tokyo, Sapporo, Jakarta, Sydney, and Melbourne.  Macau to Hanoi direct service is commencing February 13th.




Bally Technologies Inc. has announced that they have been awarded an enterprise wide contract with Galaxy Entertainment Group to provide a comprehensive table, slot, and casino management system in Macau.  Bally will replace its competitors' systems at the StarWorld Hotel and Casino, GEG’s flagship property in May 2010 and follow in the first calendar quarter of 2011 at the new Galaxy Macau on the Cotai Strip.


According to the Research Edge quant models, the XLU was the first sector in three days to break TRADE.


In early trading the futures are unchanged ahead of the non-farm payroll number.  On the margin we are going to be bullish on the jobless numbers and the unemployment rate for the foreseeable future.  


With the exception of the NASDAQ, every major Index finished mostly higher on Thursday, with the S&P up 0.40% for a fourth straight session. No matter what seems to be thrown at this market it does not want to go down.  Yesterday, the market was able to shrug off a decline in China’s equity market on news of tighter credit and a bounce in the dollar.  Although, those sectors that closely aligned to the RECOVERY trade – Energy and Materials - underperformed yesterday. 


On the MACRO calendar initial claims rose to 434,000 in the week-ended January 2nd from 433,000 in the prior week. The increase was a bit better than the consensus, which was looking for claims to rise to 439K. The four-week moving average fell to 450K from 461K, the lowest level since September of 2008.  The December employment report will be released shortly and according to a Bloomberg survey, the consensus is looking for an unchanged reading following an 11,000 decline in November. The unemployment rate is expected to hold steady at 10%.


As I said yesterday in a note to clients, the question now is not are we going to see 11-12% unemployment but how quickly does it go to 9%.  In the short-term expectations are for unemployment at 10.1%, and that is still too high, especially for 1H10.  Referring to Josh Steiner's note on the census hiring this year, the government is going to add 1.2 million job additions in this country in the next 3-4 months.  Yes they are short term jobs but they are going to be in the reported data and unless you submit that weekly jobless numbers and monthly unemployment numbers don't matter, how they are accounted for MATTERS.


For the second time this week the Financials (XLF) has been the best performing sector.  The rally in the bank stocks continued today with the BKX up +4.1% yesterday and 9.9% for the week.  Yesterday, BKX had its biggest one-day gain in almost six months.   Our Financials analyst Josh Steiner penned a note yesterday on the XLF saying that “Senator Chris Dodd's (D-CT) announced resignation yesterday morning is a positive catalyst for the XLF as his departure casts further doubt around the financial regulatory overhaul process now underway.”  Regional names that underperformed last year continued to drive the group higher, with ZION +11.2%, HBAN +11.1%, RF +8.8% and MI +8.7% among the best performers.


After big outperforming in 2009, Technology (XLK) is one of two sectors that are down so far in 2010.  Memory names which started the week stronger, weighed on the semiconductors yesterday with the SOX (1.1%).  The software group remained for sale with the S&P Software Index down 0.7%.  We continue to be SHORT MSFT in the virtual portfolio. 


The third best performing sector yesterday was the Consumer Discretionary (XLY).  The XLY benefited from retailers as the S&P Retail Index +0.8%; its biggest gain thus far this year.   Notable gainers included TJX + 5.1%, ROST + 4.1%, JWN + 4% and M +2.3%, all of which reported better-than-expected comps and raised Q4 guidance. In addition, SHLD increased 11.6% as it guided its Q4 EPS meaningfully above the Street, while a Research Edge favorite BBBY increased 6.9% on earnings/guidance.


The range for the S&P 500 is 15 points or 0.5% (1,145) upside and 1.0% (1,130) downside.  At the time of writing the major market futures are trading flat on the day.    


Copper fell for a second day in London on speculation that demand may slow as China moves to end economic-stimulus measures.  The Research Edge Quant models have the following levels for COPPER – buy Trade (3.37) and Sell Trade (3.50).


In early trading today Gold is down for the second day in a row as a stronger dollar curbed demand for the metal as a hedge against weakness in the currency.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,087) and Sell Trade (1,137).


Crude oil is trading little changed around $82.54 a barrel in New York, heading for its fourth weekly increase as the cold weather remains a factor.  The Research Edge Quant models have the following levels for OIL – buy Trade (80.38) and Sell Trade (83.96).


Howard Penney

Managing Director














The Necessity Of Progress

"Restlessness and discontent are the first necessities of progress.”
-Thomas Edison
I have been very critical of both the US Treasury and the Federal Reserve. This isn’t about starting a fight. This is about the restlessness and discontent that anyone with a pulse in this fine nation feels. I have worked hard to own myself. I will not be paid off to be willfully blind.
It’s ok to be critical of people, plans, and processes if you end up being right. That is The Necessity of Progress. I am not right all of the time, but I wake up every morning expecting to be. Those who don’t like the sounds of that have probably never had the honor of playing for a Championship team. Winners expect to win.
In the last 24 hours, both He Who Sees No Real-Time Data (Bernanke) and the Squirrel Hunter (Geithner) have lost America’s trust, again! First, Geithner was YouTubed (called out) by Bloomberg’s Hugh Son, who revealed that Timmy’s pattern of withholding information on his own taxes repeats (he told AIG to limit their disclosures). Then, Ben Bernanke sent the following note to those who have been chowing down on the government sponsored Piggy Banker Spread:
“The Federal Reserve Thursday released an advisory reminding depository institutions of supervisory expectations for sound practices in managing interest rate risk… In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases.”
I call the Yield Spread (the difference between 10-year and 2-year Treasury rates) the Piggy Banker Spread, not to be critical of the bankers, but simply to call it for what it is. If both Geithner and Bernanke are going to sign off on this old-boy-network fear-mongering of the next “Great Depression”, and that allows the bankers to take whatever rate of return we used to have on our savings accounts in order to finance their own bonuses, why wouldn’t they chow down?
Take Robert Stickler’s word for it this morning (Banker of America’s spokesperson), “some people will be getting very good bonuses because they had a very good year.” Gotta love that Stickler! These guys actually think their bonuses are due to their own intellect. Newsflash: It’s the Savings Rate Stupid!
If you have time this weekend, take 10 minutes to watch Bloomberg’s all-star, Erik Schatzker, get the new Bank of America strategy for 2010. BAC’s new Captain, Brian Moynihan, doesn’t believe in doing anything structurally different. He sees no need to separate commercial banking and American savings deposits from all of the risk-taking businesses that his boys want to engage in with your money. This guy was hired to feed the pig.
At the beginning of December, I wrote about the following three bubbles, on the following three durations:
1.      Gold: immediate term (3 weeks or less)

2.      Short Term Treasuries: intermediate term (3 months or more)

3.      Piggy Banker Bonuses: long term

You can look up the charts of gold and treasuries. I keep score. Unlike our compromised and conflicted Secretary of the Treasury, my firm shows everything that we do on our portal, real-time. We are accountable and transparent. We sold all of our gold (GLD) in the Asset Allocation Model, and now we are short it.
We are also long the US Dollar via the UUP (etf). Long UUP (Dollar); short SHY (short term treasuries); and short GLD (gold) is all really the same macro call. I continue to believe that the US Federal Reserve will be signaling an end to “extended and exceptionally” low interest rates because the economic forecast embedded in that view is simply unreasonable and unsustainable.
While the inverse correlation between the SP500 and the US Dollar that we picked up on in February of last year (see our note to President Obama from 2/24/09 titled, “Breaking The Buck”) continues to decay, we are reminded that powerful macro correlations are never perpetual. That said, since the gold price peaked and the Bombed Out Buck bottomed in early December, Gold versus US Dollar continues to have an impressively high r-square.
The Fed’s version of economic forecasting is far from a science. The days of the old boy networks of Wall Street/Washington Perceived Wisdoms are finally coming to a much appreciated halt. I don’t need to believe in Bernanke and his best buds Big Government friend, Paul Krugman, to manage my risk. Nor do I need to subscribe to the ‘we are the chosen ones’ mantra that permeates the craws of any one of Robert Rubin’s disciples (Geithner).
I need to answer the bell every morning at 4:03 AM in a passionate search for the truth. It changes every day. That’s The Necessity of Progress.
My immediate term support and resistance levels for the SP500 are now 1130 and 1145, respectively.
Best of luck out there today,



XLK – SPDR Technology
Buying back Tech after a healthy 2-day pullback. Next to Healthcare, this remains our favorite sector in the SP500.

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 VolatilityThe VIX broke down to our immediate term oversold line on 1/6/10 and the II Bullish/Bearish survey is far too complacent, prompting us to add to our position on VXX.\

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.


As the gold price inches up toward the immediate term resistance line of $1137/oz, we’re going to take the other side of a long-standing bullish position.

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 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 10/30/09 and 12/2/09.

SHY - iShares 1-3 Year Treasury BondsIf 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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