Earlier this morning, Keith shorted the XLE in our virtual portfolio. We’ve outlined the chart of this etf below, but suffice it to say oil, the commodity, and oil producers, as represented in the XLE, are broken. The key drivers behind this breakdown are the inverse correlations with the U.S. dollar, an ongoing slowdown in China, and burgeoning inventories globally.
Two days ago we wrote a note titled, “Oil is Broken”, and we noted:
“As we discussed ad nausea last year, the direction of the price of the U.S. dollar is critical for determining the price of those commodities priced in dollars. In the year to date, the U.S. Dollar Index is up ~0.74% and, not surprisingly, Oil is down ~-6.61%. While last year the inverse correlation was more like 4.5:1, early on this year it seems like that factor is accelerating. One driver of this is likely the slowdown occurring sequentially in China.”
As the Chinese proactively slow their economy in the first half of this year via lending restrictions and higher interest rates, it will continue to have a negative impact on the demand side of the equation for commodities and primarily oil and copper. China is the world’s GDP market share taker and as its growth slows, even on the margin, it has an amplified impact on the demand for commodities, which is negative for price in the intermediate term.
On January 27th the DOE reported inventory numbers for oil and oil products. While oil actually showed a draw of 3.9 million barrels, which is bullish on face value, this was quickly attributed to weather issues in the Gulf of Mexico. Most disturbing for those bullish of oil were the build in inventories of both gasoline and distillates, which suggest a soft demand situation in the United States, the world’s largest user of petroleum.
The chart of the XLE and its key levels is outlined below.
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Consumer confidence bottomed in early 2009. In early 2010, divergences in consumer confidence among income groups will be worth watching for restaurant investors.
The chart below clearly shows a split in consumer confidence between those earning salaries of $35,000 and over and those earning $34,999 and below. Since October 2009, the wealthier segment of the population has seen a significant boost in confidence, while lower income levels have seen stagnating, or even deteriorating, levels of consumer confidence.
Looking at quarterly comparable-store sales metrics for restaurants by average check, it is clear that trends have been improving in restaurants with average check of $45+. The third calendar quarter has seen a slight tick up in trends for the $5-10 average check group. It is worth noting, however, that some of the 4Q comparable sales numbers that have been released by companies whose average checks fall within $5-10 have been negative. Carl’s Jr. has released comparable-store sales for two of the three periods of the fourth calendar quarter. Thus far for the quarter, comparable-store sales have been approximately -8%. In addition, Sonic’s comparable-store sales for the quarter ended November 30th (not included in the chart below) declined -9.1%. We anticipate declines in the trends for these companies going forward, assuming the divergence in consumer confidence between income levels remains.
Between restaurants with average check between $10-20 and $20-27.50, it seems that the $20-27.50 average check group saw more stability in the last quarter than those restaurants with average check between $10-20. At this point, it is difficult to draw a firm conclusion from the data available, but we will be paying close attention to the consumer confidence trends, comparable-store sales at various average check levels, and the relationship between the two metrics.
Below is a table indicating the companies whose data was included in the chart above:
With the meeting of the World Economic Forum this week in Davos, we’re getting a host of interviews from the Who’s Who, including European policy makers that are asked to comment on Greece’s budget deficit issues. What’s clear from the interviews is that while by in large most of the European community has tried to calm fears of sovereign default in Greece’s debt—suggesting a close cooperation with Greek officials to cut spending and hone in on its budget deficit over the next three years - we’ve also seen officials (including those with important name tags on) put their foot in their mouth. In particular, Monetary Affairs Commissioner Joaquin Almunia recently said” “Greece will not default. In the Euroarea, default doesn’t exist.”
As we’ve noted in our recent posts on Greece (see our portal), there’s plenty of evidence that sovereign default exists, and could be a reality for Greece. Further, we’d point you to “This Time is Different”, a book by Carmen Reinhard and Kenneth Rogoff that discusses sovereign default across nations over the last eight centuries. In short, Almunia’s statement seems fully absurd.
The interviews have also demonstrated that European countries are quick to dismiss their own problems in favor of calling out their neighbors. The chart of Spanish unemployment is just one of the charts referenced to deflect attention. Today, Spain released its 4Q09 unemployment at 18.8% from 17.9% in the previous quarter, well above the Eurozone’s most recent reading of 10%.
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