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DINERS AND INVESTORS CHOOSING COMFORT OVER SPEED

Please disregard prior version.

 

Besides management commentary and top-line trends, stock price movements and volume are also confirming the divergence between Casual Dining and Quick Service Restaurants.

 

QSR trends have been soft, with negative same-store sales trends and an “extremely competitive landscape” being compounded by the adverse weather in December.  Information coming from management has been insightful:

  • SONC cited the economic climate, competitive pricing, and the unpredictable weather as factors in the continued freefall in its top-line trends
  • CKR also attributed their sales results for the period ending December 28th to “poor weather conditions” and “ongoing weakness in the overall economy”
  • MCD reported that domestic comparable sales in November declined 0.6%.  This was below expectations and was the second month of reported declines.  I am expecting trends to remain negative in December (MCD is reporting December and 4Q09 results tomorrow before the market opens).
  • YUM guided to US same-store-sales growth of -8% in 4Q09, which implies about -4% for the full year.  Management guided to 2% same-store sales growth in 2010, which would imply another year of declining 2-year average trends.  Two-year trends have been declining despite lapping easy comparisons (something management has been willfully blind to)

All restaurant chains are impacted by the economy but we believe that the effect is amplified for QSR chains.  QSR chains are heavily dependent on the 16-19 year old demographic, something highlighted by JACK management on their most recent earnings call and our 01/08/10 post, “QSR – ILL TAKE ONE JOB, HOLD THE BURGER”.

 

FSR is facing easier comparisons but trends appear to be improving, on the margin, while QSR trends continue to worsen.  There has been some interesting detail provided by FSR companies regarding their marginal improvement of late. 

  • CAKE’S 4Q09 same-store-sales exceeded expectations, coming in at -0.9%.  This represented a sequential 20 bps deceleration on a two-year basis but still beat management’s guidance of -2% to -3%.  Management also stated that the sequential improvement in same-store-sales growth was “driven almost entirely by guest traffic”
  • CPKI’s management struck a positive tone in their preannouncement of fourth quarter results.  While high unemployment states continued to dampen sales growth, “comparable sales improvements in dine-in, take-out, and delivery channels were encouraging”.  Overall, comparable sales growth in the fourth quarter improved sequentially.  Nevertheless, two year trends continue to deteriorate on a sequential basis
  • BJRI’s preannouncement of comparable restaurant sales of -0.2% in the fourth quarter translated into a significant improvement in two year trends on a sequential basis.  Furthermore the company targets 13% growth in restaurant operating weeks in 2010
  • EAT’s blended same-store-sales growth of -3.1% beat the street’s expectations of -4.3%.  Two year trends for EAT’s blended same-store-sales improved about 70 bps on a sequential basis.
  • At the Cowen & Company Conference recently, PFCB co-CEO Bert Vivian was far more optimistic than last year during his presentation.  While he refrained from divulging any specifics, Mr. Vivian made it clear that while the social side of PCFB’s business is still soft, he expects business customers to continue to improve.  He anticipates modestly negative comps at the Bistro and positive comps at Pei Wei

The tone is by no means positive in either segment but the divergence between QSR and FSR is becoming more and more apparent.  This view is certainly not consensus; for some time the dominant view has been that QSR will outperform FSR as diners remained focused on value and promotions.  A WSJ article published yesterday outlined the National Restaurant Association’s prediction for QSR chains to post a 3% rise in same-store-sales while FSR are expected to see a 1.2% rise in same-store-sales.  The prevalence of this thesis only makes our view, that FSR is outperforming QSR, all the more noteworthy.  To reiterate, unemployment seems to be impacting QSR, through its important demographic groups, more meaningfully than FSR chains and we expect QSR top-line trends to continue to lag behind until that situation improves. 

 

Below is a table showing the divergence between the two segments with prices from 1/20/10 and weekly, 30 day, and 60 day price changes as well as volume and latest short interest:

 

DINERS AND INVESTORS CHOOSING COMFORT OVER SPEED - 1 21 2010 2 25 16 PM


HOUSING THE BOTTOM IS IN – WHEN WILL GROWTH RETURN?

The Census Bureau reported yesterday that December housing starts fell month-to-month by 4.0% to 557,000.  The November number was revised (along with a downside revision to October) to show a 10.7% monthly gain, after initially having been reported up by 8.9%. Comparisons are easy as December 2008 starts collapsed by 15.1%, while the year-to-year change was up by 0.2% in December.  The December year-over-year number is evidence that even with the government stimulus measures the housing market has found a temporary bottom.    

 

As you can see from the chart below, since December 2008, housing starts are bottoming at a very low level.  For all of 2009, housing starts averaged 551,750, again confirming that housing starts are bottoming at a very low historical rate. 

 

The “bottoming process” for housing is shown in the chart below, but the return to growth is less certain and the number of “starts” is significantly below historical trends.  For all of 2009, housing starts remain 64% below the level of the past decade.  Given the current job market and the fact that the Obama Administration’s housing stimulus program will end in June 2009, a significant improvement in housing starts seems unlikely. 

 

Howard Penney

Managing Director

 

HOUSING THE BOTTOM IS IN – WHEN WILL GROWTH RETURN? - ushousing starts


Chinese Charts

Since we are bearish on Chinese equities for the intermediate term, we called the Chinese government last night and had them doctor up the numbers again.

 

Here are the reported results:

 

1.       A sequential deceleration in monthly Industrial Production growth

2.       A sequential acceleration in monthly Consumer Price Inflation growth

 

If you are in the camp that these guys in Beijing are just making up the numbers, get over it and just give’m a buzz. They are looking for Americans who are not willfully blind.

 

These two Chinese charts simplify a complex macro concept – growth slowing as costs (inflation) ramp. Someone is out there calling that a Chinese Ox In a Box.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Chinese Charts - ch1

 

Chinese Charts - ch2


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Copper In A Box, Too

Copper production in China hit record levels in 2009.  According to the Chinese Statistics Bureau, output of refined copper gained 9.6% y-o-y to 4.25 million metric tons.  Clearly, a large driver of this increase was China’s stimulus program in 2009. 

 

China accounts for ~40% of global copper demand.  As our thesis on China continues to play out in Q1, Chinese Ox In A Box, and China slows sequentially in Q1, it will have a negative impact on copper demand.  We are seeing some follow through on this today with copper futures currently down ~1.2% based on the Chinese economic data released last night and comments from the Chinese government regarding fiscal policy.

 

Mining stocks echoed concerns over this potential slow down from China yesterday.  The world’s largest mining company BHP Billiton reported results yesterday  According to BHP:

 

“Government stimulus measures appear to have supported a gradual return to normalized trade levels, albeit from a low base."

 

Clearly, to the extent that government stimulus is not repeatable year-over-year, demand for copper should slow sequentially from Q4 2009.

 

In fact, concern over a potential slowdown in copper demand due to a slowing of government stimulus from China appears very justified.  Over the past couple of days, based on both a statement from Premier Wen Jiabao and a statement from the Chinese Statistics Bureau that removed reference to a “moderately loose” fiscal  and monetary policy.  This, of course, suggests that China will be tightening policy.  Reports from China suggest that the new policy will be finalized by the time the National People’s Congress meets in March.  This is on the back of China’s attempt to slow loan growth.

 

On this point, BHP also stated in their earnings release:

 

“In China, the impact of measures to control loan-growth will add another future variable. Consequently, we expect some degree of volatility in the short term outlook for our commodities.”

 

Clearly, the world’s mining companies have and are proactively preparing for the Chinese Ox In A Box, which is critical for managing their businesses.  According to a recent report by the Copper Study Group:

 

“Through October, Chinese production of refined copper grew by 43% to 1.8 million metric tons to account for 40% of world use-and nearly offset and 18% decline in the rest of the world.  Use decreased by 21% in the European Union, by 31% in Japan, and by 21% in U.S.”

 

In effect, China contributed all of the world’s incremental demand last year, which is why the global mining community have their Hedgeyes focused on China.

 

We are also starting to see a mismatch in supply and demand in global inventories.  Yesterday, copper inventories on the LME were reported up 8,000 tonnes to reach 534,650 tonnes, which is the highest level since March of 2009.

 

Currently, copper appears to be a leading indicator for the Q1 slow down in China.  Additionally, copper supply and demand fundamentals are lined up bearishly in the intermediate term.  Below, we’ve outlined our current levels on copper as of this morning.

 

Daryl G. Jones
Managing Director

 

Copper In A Box, Too - copper6

 


OCE”AINT”US

SJM’s Oceanus appears to be off to a slow start. Escalators and better signage in Immigration will help. Sands Macau catches a temporary break.

 

 

It looks like the easy access from Immigration at the Macau Ferry Terminal into the new Oceanus property is proving not so easy.  Ferry patrons are in the habit of going forward toward the buses when they exit the Terminal.  Oceanus is behind the Terminal so customers need to be led to covered walkways connecting the property to the Terminal.  Poor signage and limited advertising are not helping and Oceanus is not getting the visitation early on that was expected.    Help is on the way as escalators that lead to the property directly from Immigration have already been approved. 

 

 

We remain worried about the impact of Oceanus on Sands since both are heavily weighted toward Mass, located next to each other, but Sands is not connected to the Terminal.  In the meantime, Sands Macau seems to be holding its own.


Reining in on Greece

As speculation abounds today that the European Union could offer Greece a rescue package to address its budget deficit issues, the reality remains that the lack of credibility in PM George Papandreou’s government is a serious one that looks far from over.

 

While a rescue package is at best a rumor right now, we’re of the camp that the fiscally conservative Germans, represented by Bundesbank President and ECB member Axel Weber, will attempt to own the debate and force Greece to clean up its own mess before the international community considers floating a deal.

 

As the uncertainty over the Greek state continues, we’re seeing the premium investors demand to hold Greek debt continue to balloon, as the chart below shows the spread between the yield on the 10YR German bund and the 10YR Greek bond continue to blow out. While the spread is just off its widest in the intermediate term, certainly the trend to the upper-right hand corner is bearish, especially if supply outstrips demand.  All the while, the country’s domestic equity market (Athex Composite) has been hit hard over the last week, as CDS prices continue to run up. 

 

We’ve had our pulse on the possible ripple effects from a shaking Greece. Note the recent depreciation of the Euro versus the US Dollar, down 3.2% since 1/13, and indication to us that while the Greek economy is around less than 10% of the German economy (or roughly the size of the German state of Bavaria), the issues surrounding Greece call into question similar stresses that may be ailing other European countries.  In our 1Q 2010 Theme call we noted that the countries of Spain, Italy and Portugal are on our watch list.

 

While we covered our short position in the Euro via the etf FXE in our model portfolio on 1/19 (regrettably a tad bit early), we remain long the USD via UUP.

 

Matthew Hedrick

Analyst

 

Reining in on Greece - GR1

 

Reining in on Greece - GR2

 


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