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PFCB – 2010 NOT AS DIRE AS 2009

I would not be surprised to see this name move higher



Like last year, Bert Vivian, PFCB’s Co-CEO gave one of the more interesting presentations at the Cowen and Company Consumer Conference (at least so far).   Based on the more optimistic tone of his presentation this year relative to last year, PFCB likely had a strong 4Q09 (or at least a marginally better quarter than 3Q09).  PFCB has outperformed the casual dining group on average over the last 3 months (up 5% relative to the group’s roughly flat performance).  Considering that PFCB is trading at 6.1x on a NTM EV/EBITDA basis relative to the group’s average of 6.4x and has a current short interest of 33.4%, which is the highest percentage among its peers, I would not be surprised to see this stock continue to move higher.


Mr. Vivian provided the following commentary about his outlook for PFCB based on his own opinion about how the industry will fare in 2010.  He stated that most of PFCB’s customers are made up of social diners and business folks.  He does not anticipate the social side of the business will get much better in 2010 (maybe marginally), but it is his opinion that the business side of traffic will improve.  He did sort of hedge that comment by saying that he does not think it could be any more dire than 2009.  At the Bistro, business people make up about 30% of tickets.  Based on his outlook for slightly improved demand, Mr. Vivian provided the following rough estimates for 2010 and 2011:

  • Development: 5 units each for Bistro and Pei Wei, modest growth.  There are currently 196 Bistros and the company thinks the concept has the potential for 250 units over time.  We could expect increased development in 2011 with closer to 8-10 new Bistro restaurants and 15-20 Pei Wei units.  And, we could see a few more in 2012. 
  • Same-Store Sales Growth: Even with the expected modest pick-up in sales trends out of its business customers, the company is not expecting positive comps for the full year in 2010 (maybe turning positive near the end of the year).  Specifically, modestly negative comps at the Bistro and positive comps at Pei Wei seem reasonable.  The company has no plans to raise prices in 2010, but Mr. Vivian stated that “If the world gets better, we might take advantage and take a little pricing.” 
  • Revenues:  Translates into roughly flat revenues in 2010. 
  • Restaurant level margins:  roughly flat with 2009.  This assumption is based on the company’s current outlook for slightly favorable food costs offset by slightly unfavorable labor costs. Based on contracts in place, protein costs should be favorable over 2009. Produce is not contracted and has the same weight as chicken or beef, but assuming no plague, produce should be slightly favorable as well. 
  • Non-operating expenses: Preopening expense, interest expense and G&A are all expected to come down in 2010. 
  • Free cash flow: Free cash flow should be of similar magnitude as 2009.  Debt will be paid down by mid-year, which leaves about $40-$50 million available for share buybacks.  In general, he plans to clean up the balance sheet and take the share count down, which should put the company in good shape by year-end. 


Additional geographic-specific commentary:


PFCB is seeing a pick-up in trends in Arizona while California appears to be stable.  And, Mr. Vivian confirmed the recent noise about weakness in Texas.  This is not a small matter for PFCB as Texas represents about 20% of the company’s restaurant base.



Risk Management: SP500 Levels, Refreshed...

A lot of people seem to be waiting for a pullback that just won’t come. After seeing the SP500 trade up 6 out of the first 6 trading days of 2010, today’s -0.6% is hardly a pullback that inspires my bearish instincts.


The good news is that we don’t use instincts in managing risk anyway. We use fractal math.


Here are the refreshed lines of support that my macro model has as of 11AM EST today:


1.       Daily TRADE resistance at a higher-high = 1154

2.       Daily TRADE support at a lower-high = 1135

3.       Immediate term TRADE support = 1118


The way to read that is:


A) if 1135 holds, then there is a higher probability that this market tests making higher-highs (the YTD closing high is 1146).


B) if 1135 breaks, then there is a higher probability that this market tests 1118 (that would = -2.4% pullback).


Altogether, the immediate term TRADE line (1118) and the intermediate term TREND (1089) are bullish factors underpinning the SP500’s current price momentum.


As prices change, we will. For now, we are buying longs and covering shorts.



Keith R. McCullough
Chief Executive Officer


Risk Management: SP500 Levels, Refreshed...  - cha


LV Strip up 8.3% in November.



We don't yet have all the details (hold percentages) but the Strip was surprisingly up 8.3% in November.  As we've previously discussed, November did benefit from some slot revenue from October being recorded in November.  This happens when the month end occurs on a weekend.  Nevertheless, November was a surprisingly strong month.

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4Q09 same-store sales came in better than management’s expectations.


Prior to its presentation at an investor conference, CAKE announced its preliminary sales results for 4Q09.  The company’s comparable sales came in -0.9%.  Although this implies that same-store sales growth on a 2-year average basis decelerated about 20 bps sequentially from 3Q09, this result came in significantly better than management’ guidance of -2% to -3%.  Management had assumed that the shift in timing of both Halloween and Christmas, combined with the shift in its holiday marketing strategy away from retail sales toward a focus on gift card sales, would negatively impact same-store sales by 1%.  The company thought that the change in holiday marketing strategy could dampen sales trends in 4Q09 but build future visits.



Management stated that the strong finish to the year and the sequential improvement in same-store sales from 3Q09 (on a 1-year basis) was “driven almost entirely by guest traffic.”  During the last three quarters, traffic declined about 4%.


Even with this better than expected same-store sales growth in the fourth quarter, management’s 2010 comparable sales guidance of -1% to -2% still assumes an acceleration in 2-year average trends.

Roll On

“Roll on highway, roll on along. Roll on daddy till you get back home.”
Roll on bankers, roll on along. Roll on Geithner till you get back home. Roll on Debtor Nations, roll on through. Roll on Obama like I asked you to do. And roll on banker bonuses, roll on…
Not to be confused with the Crimson’s Tide’s recent version of “Roll Tide Roll”, these are my new lyrics of an old favorite that I used to play on my boom-box as I was riding junior hockey buses in the northern parts of Canada (Alabama’s 1984 rendition of Roll On Eighteen Wheeler).
The SP500 continues to roll on. Yesterday made 2010 six-for-six, with the SP500 making another higher-high, closing at 1146 - its sixth consecutive day of positive returns. At the same time, bankers around the world continue to call this an economic recovery that they can dump a generationally high level of debt onto.
Take some of the men formerly known as Lehman brothers over at Barclay’s word for it. Mark Bamford, head of global fixed-income syndicate at Barclays Capital told Bloomberg this morning that, “We’re telling our clients to get into the markets now… “get some of your financing done now”… “don’t leave it all for later in the year because it could be more difficult to finance”…
Roll on Mark, roll on along. Keep them banker bonuses coming until we get this all wrong. Roll on debt Daddy, roll on through. Roll on global bankers like Bernanke asked you to do. And roll on banker bonuses, roll on…
In conjunction with the US Dollar going down yesterday, so did the short end of the yield curve. The yield on 2-year US Treasuries is 0.92% this morning. That’s still a few basis points above our intermediate term TREND line of 0.90% and feeding the widest Piggy Banker Spread ever.
The yield spread (10-year minus 2-year Treasury yields) is +284 basis points wide this morning. That’s only 2 basis points away from the best financing American Savers have ever provided Investment Banking Inc.. Or is that Bernanke that’s feeding the pig? Ah, who cares at this point America – roll on!
Globally, there continues to be a massive amount of sovereign debt being rolled onto the global highways of finance. If the American citizenry doesn’t mind $83/barrel oil, and India’s consumer don’t mind the latest +18.2% reading (December) on wholesale food inflation, why not keep that debt a rollin’ in? Roll on Big Government Debt Daddy, roll on along!
In the last week, we have seen the following sovereign debt issuers come to market:
1.      Philippines

2.      Turkey

3.      Indonesia

4.      Poland

5.      Greece

6.      Mexico

No, no, Momma. These are not the three little pigs. These are the first six big ole 2010 tractor trailers full of sloppy sovereign debt to roll into town, taking that ole brother Lehman advice, “get some of your financing done now”!
Mexico is actually smart enough to spread the Debtor Nation love around the world. They’ve opted to issue another $2.4B in bonds via Japan and Europe this morning. Don’t worry about it, this is the good kind of Mexican debt folks. This is the kind that Robin Williams talked to Charlie Rose about the other night:
“like a bunch of junkies who have relapsed… listen my man, I just need some liquidity… I just ran into some bad subprime… I will not screw you again – this is not like the other time. I’ll pay you back!” (You Tube link: http://www.youtube.com/watch?v=JuFnzNsz3sc  )
Look on the bright side, this week’s Polish $4.3B sovereign debt issue doesn’t have 69 dead from an overnight Mexican drug war to deal with this morning. For Poland, this is the largest debt issuance in the last 4 years. Pile that debt upon debt boys; get those bankers their bonus, and roll on!
Marked-to-market equity trading in some of the more obvious sovereign debt laden countries (Greece and the United Arab Emirates) doesn’t like all of this debt and country music stuff. The Athex Composite in Greece is trading down -2.2%, while the DFM Index in the UAE is trading down more than -2.4%.
Oh, and in response to this mounting global debt speculation, China is raising rates on domestic debt for the 2nd time in 2 weeks this morning. Additionally, they are raising the reserve requirement for domestic banks by another 50 basis points.
Roll on Debtor Nations, roll on.
My immediate term TRADE lines of support and resistance for the SP500 are now 1134 and 1153, 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 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 Volatility The VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.

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 12/8/09 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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.


FXE – CurrencyShares Euro
We shorted the Euro ETF on strength on 1/11/10. From an intermediate term TREND perspective we remains bullish on the US Dollar Index.

GLD – SPDR GoldAs 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 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.


The MACRO calendar in the USA has been very light over the past two days and earning season did not get kicked off until last night.  Until AA performance last night, consensus expectation for the upcoming earnings season was upbeat, especially given the easy comparisons.  While comparisons are easy, expectations have increased too.  That means it’s never really EASY, as it’s always hard to live up to expectations!     


While the S&P 500 is up for six straight days, overall yesterday performance can be better characterized as mixed with volume very light as the breadth of the market continues to narrow. 


Volatility is getting crushed here in early 2010.  The VIX declined 3.2% yesterday and is down 19% so far this year.  As we said yesterday in a note to clients the VIX is in what we call a Bearish Formation. That’s when the long term TAIL sits above the intermediate term TREND; and the intermediate term TREND line sits above the immediate term TRADE line.  The VIX is much more a concurrent indicator than a leading one. We would be long volatility here on weakness.


The global MACRO calendar provided some momentum to the RECOVERY trade in the wake of better-than-expected December trade data out of China, although the MATERIALS (XLB) was the worst performing sector yesterday.


China reported that exports jumped 17.7% year-over-year in December, above the 5% growth expected by the market and the first positive reading since November of 2008. Machinery products, textiles and furniture were the groups that saw the biggest increase in exports in December.  In addition, imports surged 55.6% year-over-year last month, up from the 26.7% increase in November.


Overnight China’s central bank sold one-year bills at a higher yield for the second time in a week, increasing the chance that higher interest rates in the first half of the year are a near certainty.  


The industrial (XLI) was the best performing sector yesterday.  The Transports was a key driver after rallying more than 2% last Friday.  Specifically, UPS rose 4.4% as JPMorgan added the stock to its focus list following the company's upside surprise last week. Additionally, Machinery stocks were also strong driven by the better-than-expected trade data out of China, which put some momentum behind the global recovery theme.


The Technology (XLK) cannot seem to find a bid.  The software stocks continue to be one of the worst performers within the XLK.  Additionally, hardware names were also sluggish with RIMM, IBM and AAPL among the laggards.  The semis were also weaker today with the SOX down 0.2%. 


The record drop in consumer credit continues to put focus on consumer deleveraging concerns as the Consumer Discretionary (XLY) was one of the worst performing sectors yesterday.


The range for the S&P 500 is 19 points or 0.6% (1,153) upside and 1.0% (1,134) downside.  At the time of writing the major market futures are trading lower.    


Yesterday the CRB declined 1.3% on the back of a big decline in orange juice, corn and wheat.  Aluminum, Sugar and Gold were the best performing commodities in the CRB yesterday. 


In early trading today Copper is trading lower on the stronger dollar.    The Research Edge Quant models have the following levels for COPPER – buy Trade (3.38) and Sell Trade (3.50).


In early trading today Gold Is little changed as it continues to trade near a one month high.    The Research Edge Quant models have the following levels for GOLD – buy Trade (1,126) and Sell Trade (1,160).


In early trading Crude oil is trading down for the second day in a row.   The Research Edge Quant models have the following levels for OIL – buy Trade (81.32) and Sell Trade (84.52).


Howard Penney

Managing Director














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