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Eye On Leadership: Bon J-Obama In Berlin!

Barack Obama is being received like a rock star as he gives a speech right now to a massive crowd in Berlin, Germany.

Almost 75% of Germans polled said they'd like to see him as the next American President. Breaking down Washington and Wall Street's walls is all one and the same to me.

This is not about individuals. This is about changing broken organizations...
KM
"Bon J-Obama"

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

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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

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

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