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Eye on Putin Power...

This picture is scary, for a lot of reasons. Putin may very well have gone too far too fast however. Now that natural gas and oil prices aren't bullet proof, his pedestal of would be global political power shakes.

The picture below comes from the two day visit Chavez is having in Russia this week. Yesterday he was lobbying Putin and Medvedev to form a "strategic alliance" with Venezuela. Chavez went on record saying "if Russia's armed forces want to be present in Venezuela, they will be given a warm welcome."

See our earlier post today on Russia's stock market breaking down for more.

Because geopolitical risks are ignored, certainly does not mean they cease to exist. That’s why one of my investment themes remains keeping an “Eye On Putin Power.”
KM
AP Picture From This Week

DIFFERENT PAULSON; STRONGER LEADER - THE MARKET NEEDS HIM

While I have been focused on Hank Paulsen’s reactive interpretation of providing the market leadership, John Paulson, who manages the $33B hedge fund Paulson & Co., has been busy coming up with proactive solutions.

Along with Peter Thiel at Clarium and Phil Falcone at Harbinger, Paulson is providing some light for an industry that is entering its dark cycle of rationalizing over supply. According to Bloomberg’s Saijel Kishan, “the money manager whose wagers against the U.S. housing market helped him earn an estimated $3.7 billion last year, is starting a hedge fund to provide capital to financial firms hurt by mortgage writedowns.”

Finally – a leader stepping up to take on risk and be held accountable to his investors for it.
Leadership is earned, not appointed. Let the healthy cleansing of US financial industry begin.
KM
New York Times Pictured Paulson In A March Article titled "Winners Amid Gloom and Doom".

Changes to the MCD business model and guidance

Commodity costs increasing

08Q1 - In 2008, U.S. beef costs are expected to be relatively flat and chicken costs are expected to rise about 5% to 6%. In Europe, beef costs are expected to be up 3% to 4%, while chicken costs are expected to increase approximately 6% to 8%.

08Q2 - In 2008, U.S. beef costs are expected to be up 8% to 9% and chicken costs are expected to rise about 5% to 6%. In Europe, beef costs are expected to be up 8% to 9%, while chicken costs are expected to increase approximately 7% to 8%.
Lower Tax rate

08Q1 – MCD expects the effective income tax rate for the full-year 2008 to be approximately 30% to 32%, although some volatility may be experienced between the quarters in the normal course of business.

08Q2 – MCD expects the effective income tax rate for the full-year 2008 to be approximately 29% to 31%, although some volatility may be experienced between the quarters in the normal course of business.
No Change to G&A trends

08Q1 – MCD expects full-year 2008 selling, general & administrative expenses to decline, in constant currencies, although fluctuations may be experienced between the quarters due to items such as the 2008 biennial Worldwide Owner/Operator Convention, the 2008 Beijing Summer Olympics and the August 2007 sale of the Company’s businesses in Latin America.

08Q2 – MCD expects full-year 2008 selling, general & administrative expenses to decline, in constant currencies, although fluctuations may be experienced between the quarters due to items such as the 2008 biennial Worldwide Owner/Operator Convention, the 2008 Beijing Summer Olympics and the August 2007 sale of the Company’s businesses in Latin America.

No Chang in Capital Spending

08Q1 – MCD expects capital expenditures for 2008 to be approximately $2 billion. About half of this amount will be reinvested in existing restaurants while the rest will primarily be used to open 1,000 restaurants (950 traditional and 50 satellites). The Company expects net additions of about 600 restaurants (700 net traditional additions and 100 net satellite closings). These restaurant numbers include new unit openings in affiliate and developmental license markets, such as Japan and those in Latin America, where the Company invests no capital.

08Q2 – MCD expects capital expenditures for 2008 to be approximately $2 billion. About half of this amount will be reinvested in existing restaurants while the rest will primarily be used to open 1,000 restaurants (950 traditional and 50 satellites). The Company expects net additions of about 600 restaurants (700 net traditional additions and 100 net satellite closings). These restaurant numbers include new unit openings in affiliate and developmental license markets, such as Japan and those in Latin America, where the Company invests no capital.

No Change in the cash returned to Shareholders

08Q1 - For 2007 through 2009, MCD expects to return $15 billion to $17 billion to shareholders through share repurchases and dividends, subject to business and market conditions. For the full year 2007 and the first quarter 2008 combined, the Company returned $8.2 billion to shareholders.

08Q2 - For 2007 through 2009, MCD expects to return $15 billion to $17 billion to shareholders through share repurchases and dividends, subject to business and market conditions. For the full year 2007 and first half of 2008 combined, the Company returned $9.4 billion to shareholders.

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PNRA - One of the Most Inflation Sensitive Business Models in Restaurants…….

Panera’s 2Q results reflected positive transaction growth despite a 5.5% retail price increase and operating margins grew YOY for the first time in 11 quarters, partly due to the 5.5% price increase. Panera was successful in sustaining 1Q08’s positive transaction/mix while growing margins, which is typically an indication of a balanced use of price. In the first 27 days of 3Q, however, this balance has already fallen off as transactions are running down 2.4% with retail pricing up 6%. The company is facing huge commodity headwinds in 2H08 and looking out to 2009, due primarily to higher wheat costs and gas prices. Management has set an internal goal to increase margins by 150-200 bps in 2009 off of 2007 levels despite these rising costs, which makes pricing a necessary component of this growth.
The company raised prices by 2.5% in November 2007 and followed that with a 2.7% increase in March 2008. Panera implemented another price increase on its bagels in June and is targeting a 1% increase across the menu in September, resulting in average pricing of 6.5% in 3Q08 and 6% in 4Q08. And, management commented that testing of a new pricing initiative for 2Q09 will take place in 4Q08. Although management stated over and over again that its quarterly value surveys show that the brand’s value perception has not changed since November 2007 when the company became more aggressive with its pricing initiatives, these price increases are concerning as it relates to their eventual (or current as it relates to early 3Q08 performance) impact on traffic trends. Management guidance assumes 1.5% to 2.5% transaction/mix declines in both 3Q and 4Q. On a positive note, Panera’s new breakfast sandwich helped to drive incremental traffic in 2Q while driving higher gross profit per transaction.

The big question going forward continues to be centered on increasing costs. Management has become more proactive in locking in its commodity requirements and is now purchasing its primary commodities six months ahead for a six month timeframe. This allows management to more effectively manage cost volatility. Panera has locked in 95% of its wheat requirements for 1H09 at a favorable price relative to 1H08 levels ($10 per bushel versus an average of $15) and expects to contract its 2H09 costs in 4Q08. Despite this YOY favorability in wheat costs, management is currently forecasting 5%-6% commodity inflation in FY09 with gas prices representing the biggest risk and unknown. It is this commodity risk combined with continuing concerns about the economy which led management to state that relative to the street’s current 2009 EPS growth projections of up 17%-21%, those expectations for growth “greater than 20% are not prudent at this time.”

Reactive Suppliers: MCD and COST Ain't Lovin' It?

McDonald’s and Costco are both flashing negative divergences today, trading down in an up tape. Why? Well, mostly because their margins are under assault by lagging effects of inflation. The stock market is trading up because reported inflation for July will show a sequential downtick from the June highs. These stocks are down because their suppliers are reacting to trailing data.

On their conference call right now Costco is saying that price increases they had assumed they would get from suppliers are larger and more frequent. The upshot is that in the near term, COST will have a much larger LIFO adjustment from inflation.

It’s important to understand that Macro wags the tail of many CFO’s. These guys are rarely early, and mostly late.

COST and MCD are trading down -10% and -2%, respectively.
KM
Its What's Inside That Counts!

Commodity Trends – EYE on Corn

Corn fell to the lowest in almost two months amid speculation falling energy costs will diminish the appeal of commodities as a hedge against inflation and as Japan plans to cut imports of the grain. In sympathy, wheat and soybeans also declined.
  • Japan, which imports more than 60 percent of its food requirements, the highest level among developed countries, wants to become less dependent on overseas grain supplies to protect it from soaring international prices and ensure long-term security of supply, Yuji Sawa, vice minister of Agriculture, Forestry and Fisheries, said in an interview.
  • South Africa, the biggest corn producer in Africa, may increase its forecast for this year's crop by 1.7 percent, according to a Bloomberg survey of grain traders.

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