How Long Can MCD Buck the Trend?

Starbucks stated earlier this week that it is experiencing a slow down in the U.K. market, which resulted in a slight traffic decline. CEO Howard Schultz said there are signs in the U.K. that remind him of what happened in the U.S. in the beginning of 2008 and “those signs kind of bode downward in terms of consumer spending.”

Today, Bloomberg reported that according to the Experian Group Ltd., British consumers made fewer visits to retail outlets in July, the third consecutive fall, as fears of an economic decline and rising energy and household bills deterred shoppers. Retail visits fell 2.6% from a year earlier and Experian forecasts sales volumes in the next 12 months will be ``the slowest period since the early 1990s.”
  • McDonald’s management said on its recent 2Q08 earnings call that “even in spite of declining consumer confidence in the U.K., our sales, our guest counts, and our margins continued to grow in the second quarter and were a strong overall contributor to our overall results.”
  • It is important to remember that MCD stated on its 4Q07 conference call back in January that “historically though McDonald's has not been as affected by a slowdown in consumer spending as other retailers because of our everyday affordability.” Although MCD’s U.S. comparable sales have held up relative to other restaurant companies after flattening in December and then turning slightly negative in March, its margins have suffered significantly (down every quarter since 1Q07). MCD’s U.S. margins have been hurt as more of its customers use the Dollar Menu. In 2Q, U.S same-store sales were up 3.4% with guest counts accounting for 75% of the growth. Pricing was up 4%, which implies negative mix or some trading down. MCD’s U.S business has been impacted by the economy and signs of a weakened economy in the U.K. will inevitably emerge in MCD’s Europe results as the U.K., France and Germany account for two-thirds of MCD’s operating income in Europe.

Unemployment Lines Continues To Lengthen - Cash Is King!

This morning's unemployment number didn't surprise us whatsoever. The US unemployment rate continues to increase, monthly. At 5.7%, this is certainly not the end of the unemployment cycle. With US bankruptcy filings ramping up this week, I think we're still closer to the beginning, rather.

Everything levered to cheap money has either crashed, or is in the midst of crashing. Commodities of course were the hold out, until they had their worst month in 28 years (July).

In a market where access to capital continues to tighten alongside cost of capital rising, CASH IS KING.
  • Keith R. McCullough
    Chief Investment Officer
    Research Edge, LLC

Selling My Chinese Rental, FXI

Overnight, China reported the 1st contraction in their PMI survey since the survey has been available to analyze! As the facts change, I do. China was a long position I took against my short Japan (EWJ) position in July.

After this week's alarming Japanese economic data, I am much more comfortable being outright short Japan, than hedged with a qualitative catalyst, like China's upcoming Olympics.

China led Asian advancers overnight, closing up another +0.94% at 2939 on the Shanghai Index, which has equated to a +5.7% advance since July 1st, outperforming most major asset classes, globally, for the month.

Buy low, Sell High.
*Full Disclosure: I sold my FXI this morning into a strong open.

(chart courtesy of

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"Citi says SEC has issued a formal order of investigation"

This headline just hit the tape from our friends at Street Account. The Pandit Bandit is not out of the woods yet...

Old bridges and their structures are being investigated, and rightly so...

China Meat Prices Rising Steeply

CHINA - Meat and poultry prices have risen by more than 27% in the last year. The cost of meat and poultry in June was 27.3% higher than the same month in 2007. Edible oils, grains and vegetables were up by 43%, 8.7% and 8.3%, respectively.

For the first half of the year and after adjusting for inflation, average disposable income in urban areas has risen by 6.3% to 8,065 yuan (CNY) and average personal expenditure by 5.7% to CNY 5,490.

The official report continues that the growing and economically powerful middle classes are beginning to be concerned about the trend towards rising food prices.

ThePoultrySite News Desk

The Eclipse

Another month end has come and gone. Another round of winners and losers in this business has emerged. With each passing day we are finally seeing the unwind of bull-market business models, leadership styles, and the investment processes embedded therein.

On this day of August 1, 2008, we will witness the Moon’s shadow crossing our Earth’s surface . Not unlike this day in 1831, when the New London Bridge opened (replacing the 600 year old structurally impaired and damaged one), today is the beginning of many great days. Today is the eclipse. Out with Wall Street’s old ravaged model that lacked transparency and accountability. In with the new and evolving changing of the guard.

John Thain’s Merrill Lynch is being sued this morning by the government of Massachusetts for fraud, while Peter Thiel’s Macro Fund, Clarium Capital, is being beneficed by George Soros as the new rising sun of global macro investing. The 40 year old Thiel is up +47% for his limited partners for the year to date, while Merrill is printing bailout paper -40-50% in the hole to its existing shareholders, telling them one thing, and doing another. Merrill takes out full page ads in Barron’s talking about their history. Meanwhile, Thiel is building businesses like PayPal and Clarium that are simply replacing their outdated foundations.

The US bankruptcy cycle that we hosted a conference call on last month is now in full motion. Our view was that the breaking down of the US financial system, and those old bridges holding it together, would lead to collapses on Main Street America. Since that call, Brian McGough has already worked through 3 bankruptcies in the US department store sector (Mervyn’s, Boscov’s, and Goody’s); Howard Penney was flashing Bennigan’s Steak going under this week; and Todd Jordan is watching private equity held casinos blow through their debt covenants. No, Wall Street doesn’t shop, eat, or smoke at these places. But that certainly doesn’t mean they cease to exist. Yesterday’s US jobless claims number reflected an ominous unemployment line forming, as a result.

I took the 4 train down to Wall Street on Tuesday, then I was in Boston on Wednesday, having meetings with American capitalists that have one thing in common – they’re changing. No, John Thain and Dick Fuld won’t see this powerful force of revolutionary American grit, until it’s too late. God Bless that reality. Out of this economic crisis, great changes are being born. Creative destruction has always been the answer in this country. It won’t go away – people that lie will. Schumpeter, Thiel, and the folks at Google will all raise their glasses to that.

The innovative geniuses at Wikipedia would do the same, and they call “an eclipse is an astronomical event that occurs when one celestial object moves into the shadow of another.” The forces of nature are in motion to see this through on Wall Street. I for one have been overly critical at times of what didn’t make sense to me in this business anymore. Those shadows are moving behind us. Now, I’ll have my feet on the floor early in the mornings, looking forward to new suns rising.

Have a great weekend,

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