prev

EYE on Operating Leases

CMG, CAKE and PFCB will all face higher operating lease payments going forward. Each of these companies reported increased margin pressure in 2Q, and these increased expenses add the risk of further complicating margins. The chart below looks at the companies’ minimum operating lease obligations in future years relative to their reported 2007 minimum rent expense.
  • Their high unit growth strategies have likely pushed their respective management teams to compromise their real estate standards, leading to less favorable lease terms. For reference, as of their most recent 10-Ks, JBX, DRI and EAT are all subject to operating lease obligations that decline each year.
  • CMG management addressed this issue on its conference call yesterday, saying:

    “Occupancy costs as a percentage of revenue were up during the quarter, primarily due to our opening proportionally more restaurants in more expensive, densely populated areas such as Boston, New York, Philly, Washington DC, Florida, and San Francisco. In addition to being much more expensive on a square footage basis, these sites typically have significantly higher non-cash straight-line rent expenses associated with them as we lock up these sites for the long term with cap rent escalation. In fact, half of the 20 basis point increase in the quarter is due to an increase in this non-cash straight-line rent. Of the total occupancy rent expense – occupancy expense in the quarter of about 1.6 million or 50 basis points is non-cash, straight-line rent related to future rent escalations. While these rent escalations are expensed today, they typically relate to escalations that are payable 5 to 20 years from today.”
Operating Lease Payments Relative to 2007 Expense

Japanese Export Data Sashimi’d

Japan reported their worst monthly export number in 4 years today. Japanese exports came in at down -1.7% year over year for the month of June. On the global growth front, this is one of the worst economic data points I have on my sheets for this week.

Obviously this reminds us that Asia has slowed. But what does this tell us about governments that opt to bail out their banks and devalue their currency? The Japanese economic narrative is not one that Ben Bernanke should aspire to have his name associated with.

It’s time for the US to raise interest rates.
KM

Brazilian Inflation Fighters

Henrique Mereilles, Brazil’s central bank head, has no patience for a wage and price spiral. Brazil has been there, done that. He is respectful of history, as we are. History repeats, and those who do not respect that, repeat its mistakes.

Brazil raised interest rates overnight by another 75 basis points, taking their benchmark rate to 13%. This is definitely one of the factors creating weakness in the commodities markets this week. The world needs inflation fighters, and if the USA is not going to take that leadership role, a country like Brazil is good enough for me.

Well done, Mr. Mereilles.
KJM

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

MACAU UPDATE FROM THE GROUND

Two nuggets from our sources stationed in Macau:

1. The Macau Government seems to be serious regarding a potential 5,000 table cap per license. They may have already set up an investigative committee to look at the cap. If implemented I think there would be some sort of grandfathering for already permitted developments. A cap would obviously result in a pretty big boost to same store revenues.
2. It appears that traffic at the Venetian Macau has actually picked up recently despite the new Visa restrictions. Assuming it translates into volume this would be a pretty nice boost given the lower than expected market share and margins at the property thus far.
I’m still not quite ready to jump on the Macau bandwagon just yet. Overall mass market traffic growth will slow due to the Visa restrictions and I’m not sure the Junket rate cap will hold. Also, putting a 14x terminal multiple on Macau EBITDA, as some analysts do, seems a bit excessive. However, there are a number of positive catalysts that could make these stocks interesting from a long perspective again including the table cap and a potential tax rate reduction in advance of Singapore opening up (with substantially lower tax rates.)

Vietnamese Inflation Backs Off

Recall that Vietnam signaled the global inflation cycle very early, back in November of 2007. Today’s inflation report for July could very well signal the top of inflation becoming consensus. Inflation in Vietnam slowed for the 1st time since October 2007, coming in at +1.1% month over month, versus last month’s +2.1% increase.

While +27% year over year inflation is hardly deflationary. The point here is the sequential monthly rate of change. I think this will be broad based across country level inflation reports as the July data is released in August.

Inflation is consensus. Now the focus shifts to trying to find when/if it slows.
KM

EYE ON AGRICULTURE - CORN

RISK REMAINS! Corn plant roots are shallow due to flood conditions earlier in the year and are currently more vulnerable to dry weather conditions. This year's crop is pollinating later than normal which puts it in harm’s way for hotter/dryer August conditions. The lateness of the growth could potentially expose the roots to frost. The same situation holds true for Soy.
  • Texas: EPA Administrator Stephen Johnson and Texas Governor Rick Perry agreed to delay the renewable fuels waiver decision - if prices continue to drop during the delay period it becomes more likely that the EPA will deny the waiver (7/24 was original deadline.) Cattle lobbyists maintain that current RFS mandate, coupled with any unforeseen weather issues, could drive corn to $8 for 2009 season when mandatory blending goes into effect. To put it in context: There are 162 operating ethanol plants with 41 under construction or expansion In the US, with almost all running at significantly less than total capacity. Total US ethanol capacity is estimated at 9.4B gallons currently.
  • Canada: C.D. Howe Institute (economic think tank) sponsored study by University of Guelph (top agricultural sciences school in Canada) has stirred protest from bio-fuels industry groups. Study contends that there are no demonstrable environmental benefits of current bio-fuel process. Canadian media have linked study to World Bank report earlier this year which contended that bio-fuels were responsible for 75% of global food inflation.
  • South Korea: Increasing use of black sea barley for stock feed -Ukraine/Russia harvest expected to be good. This potentially has a negative pressure on Barley buyers in NA as Canadian farmers were more focused on Corn & Wheat due to pricing.
This chart shows pricing levels for the most recent closing price next to the prior closing price for CBOT corn futures contracts maturing between September 08 and December 10.
This chart shows pricing levels for the most recent closing price next to the prior closing price for CBOT wheat futures contracts maturing between September 08 and December 10.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

next