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As a former CPA, I know that from an accounting perspective, accelerating expenses is considered “conservative”. As a financial analyst I disagree. Big charges certainly suppress current GAAP earnings. However, companies know that analysts exclude big charges and expenses as one-time items in their calculations of “operating” EPS. Moreover, big charges can reduce future periodic expenses and obviously inflate forward EPS. That sounds aggressive to me, not conservative.

Many companies assist the analysts by providing Adjusted EPS. My analysis shows that in most cases Adjusted EPS just excludes bad stuff. Looking back at the last 6 quarters in my universe, gaming companies are clearly the most egregious offenders while leisure companies tend to shy away from the adjustment game. Lodgers fall somewhere in the middle. Gaming companies provided Adjusted EPS that was higher than GAAP EPS an astonishing 80% of the time. Contrast this with the leisure group at only 7%. Within the gaming sector, BYD, LVS, and PNK are perfect with their Adjusted EPS batting average exceeding GAAP, and WYNN is not far behind. We at Research Edge are not big fans of EPS to measure valuation and this is just one more reason why.

Gamers consistently report Adj EPS higher than GAAP

Bottoms are Processes, Not Points

The weekend has ended, unfortunately. Welcome back to the grind. This morning reminds us all that it is “global this time”, indeed.

Asia woke me up early with signs of geo-political tail risk that no one wanted to see come to fruition - terrorist related risk into the Olympics. A border patrol station was attacked in Xinjiang, China overnight, and 16 policemen were killed. Local reports, as usual, we’re lacking details, but this set off selling in both Hong Kong and Chinese stock markets. They closed down -1.5% and -2.2%, respectively, leading Asian trading to the downside.

Indonesian inflation was released for July at a 22-year-high of +11.9%, alongside ramping South Korean and Thai inflation reports that surprised me to the upside late last week. Considering that inflation continues to accelerate as Asian economic growth continues to decelerate gave me plenty of reason to sell my “long China” trading position, and stay short Japan. I issued these notes intraday on Friday in our portal.

Japan’s economy is stagflating, and the Nikkei is finally starting to reflect the last few weeks of economic data that have outlined as much. The Nikkei lost another -1.2% overnight, closing at 12,933, and has lost a sharp -5% since the last week of July. I remain short Japan via the EWJ exchange traded fund. On a breakdown through 12,754, I see a test of the March lows of 11,787 as likely.

Pre-market open news flow in the US doesn’t smell any better than Friday’s left over pot of coffee. Over the weekend we saw number 8 on the US bank failure chart come to bear with First Priority Bank going under. Assets were insured by the FDIC, but one has to seriously wonder what Main Street America’s “First Priority” will be if and when this bankruptcy cycle trend continues. Our call has been to get yourself into cash – cash is king – and no one knows that better than Americans.

The ‘Challenger’ jobs report that came out this morning is equally as concerning as the belly up cycle, and in many regards is a function of it. Challenger is reporting that planned job cuts in the United States of America shot up +26% on a month over month basis in July!

After the worst month for commodities in 28 years, the “I” (inflation) factor in our “RIPTE” consumer spending model has clearly toned down, but the “E” (employment) factor continues to flash amber lights. What’s more important to US investors, negative real economic growth or an inflation trade that lost its “positive momentum”? I can tell you what the “Fast Money” community of “buy high, and sell higher” thinks about the answer to that question. Run.

Commodities look like the last leveraged asset “bet” to be imploding. We have basically gone across all 5 asset classes that I care about (Stocks, Bonds, Real Estate, Cash, and Commodities), and crushed them systematically. Commodities were the holdout, and Bernanke can put a quiver into the back of levered long inflation trades if he appropriately steps up and takes a stand at tomorrow’s FOMC meeting. Being in cash remains the best way to participate in the long term healing process that this country will need to fix this mess. Bottoms are processes, not points, and we need to ensure that bottoming processes in the US Dollar, US Housing, and US Equity portfolios is in motion.

As we patiently await Ben Bernanke’s accountability session this week, the world has their Chinese Olympic ‘You Tubes’ on. It is “global this time”, indeed - and everyone is watching.

Have a great week,

Another Weekend, Another US Bank Fails...

First Priority Bank was shut down by the Feds this weekend. FDIC insured customers will have to go to Suntrust Bank of Atlanta now. This is #8 on the US Bank Failure list.

The latest victim of the US financial system crisis had $259 million in assets and 6 branch offices. When we held our “Bankruptcy Cycle” conference call in mid July, this was one of the main points. We are in the early innings of the cycle here, not the late ones (see chart below).

Keep your eyes on your money – cash is king.

Nat Gas: The Calm Before the Storm...

The National Hurricane Center reported that a tropical disturbance (a baby storm) is forming today in the Gulf of Mexico. Any indication that this could turn into a storm of significance will be felt when the electronic market for Natural Gas futures opens this evening.

We had our eye on Natural Gas last week. The spike in NG futures late in Friday’s session was clearly a short covering event for some hedge funds that had successfully ridden the -30% July decline into the new month (see charts 1-2). There has been a general sense of calm in the market (see chart 3) after EIA inventory stats that came in on Thursday without any major surprises (Chart 4) and the lack of any major storms in the gulf so far this season.

It is important to note that historically NG has risen between July and October due to normal seasonal demand.

Besides any potential storm disruptions, we remain focused on price action in NG’s sister commodities (NG’s recent decline relative to the price of oil could spur utilities that have the capacity to switch) and, in the long term, what a sharp decline in US industrial manufacturing will mean for electricity demand.

The EIA estimated electricity consumed by manufacturing in the US at 964,112 Gwh in 02 (the last year available), which would equal over 23% of the total electricity generated in the US last year (based on estimates by the Edison Institute). Metal, metal fabrication and automotive manufacturing rank among the major domestic power hogs and we think that structural changes in US electricity consumption spurred by diminished output in these sectors could lead to further widening of the price correlation between NG & oil. Of course all that is meaningless in the near term –particularly if we experience a hurricane force supply shock.

Andrew Barber
Weekly Chart
3 Month Chart
Open Interest

US Market Performance: Week Ended 8/1/08...

Index Performance:

Week Ended August 1,2008:
Dow Jones (0.4%), SP500 +0.2%, Nasdaq +0.02%, Russell2000 +0.8%

2008 Year to Date:
Dow Jones (14.6%), SP500 (14.2%), Nasdaq (12.9%), Russell2000 (6.5%)

Restaurant Anthology – Part 2

For more details regarding any of the following highlights, please refer to the relevant postings over the past two weeks, which are sorted by date on the portal.
  • Trends in Casual Dining:
  • According to a report by real estate research firm Reis, U.S. store closings and cutbacks turned the second quarter into the worst one for strip mall owners in 30 years. Strip malls saw average vacancies spike 0.5% to 8.2%, a level not seen since 1995. To date, we have not seen a corresponding reduction in capacity at casual dining restaurants – posted July 21. Helping to alleviate some of these capacity issues is Bennigan’s and Steak & Ale's recent filing for Chapter 7 bankruptcy protection, which resulted in the immediate closure of about 200 restaurants. Although all casual dining operators will benefit from this reduced capacity, Brinker’s Chili’s restaurants should be the biggest beneficiary as Bennigan’s was a direct competitor within the bar and grill segment and there is much overlap within their biggest markets – posted July 30.
  • Current NPD data suggest that despite the gloomy economic situation, casual dining posted a 1% increase in traffic this quarter. Customer deal traffic was up 6% while non-deal traffic was down slightly and discounting and combo meal visits accounted for half of casual dining growth this quarter supported by promotions from major chains and increased visits with kids. Additionally, the bar and grill category posted the largest gains this quarter – posted July 25.
  • Eye on operating leases – CMG, CAKE and PFCB will all face higher operating leases going forward. Their high unit growth strategies have likely pushed their respective management teams to compromise their real estate standards, leading to less favorable 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 – posted July 24.
  • Commodity Highlights:
  • America’s Chicken Crisis - Two chicken processors reported, and for the first 9 months of fiscal 2008, Tyson’s chicken segment and Pilgrim’s Pride have collectively lost $263 million. This trend can’t continue. Pilgrim’s Pride has cut back on chicken production to increase prices, but reductions have not yet been enough to cover costs. Management said that chicken prices need to increase over 60% just for the company to breakeven, which means chicken prices are inevitably going higher. The company also said that it is taking steps to shorten the duration of its fixed price sales contracts, which will force restaurant operators to float more of their key commodity exposures – posted July 29.
  • BWLD has been a clear beneficiary of these lower chicken prices as it has seen a significant decline in chicken wing prices. The marketplace for chicken processors remains volatile, which is not good news for the restaurant industry – posted July 31.
  • Both Pilgrim’s Pride and Tyson’s said that consumers have not yet felt the effect of higher grain prices. Those comments combined with Kraft saying that its prices are moving to “unchartered territory” as it, too, is facing higher costs across the board means prices are moving higher in the grocery channel, which can only help restaurant operators – posted July 28 and 29.
  • Bloomberg reported that wheat from Australia, forecasted to be the world’s third largest wheat exporter this year (behind the U.S. and Canada) should return to the global market in 2008 after two years of drought, which should help to ease prices – posted July 29.
  • Risk remains for corn as 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 – posted July 24.
Restaurant Base Exposure to Bennigan's Most Penetrated States—% of Respective U.S. Restaurants
BWLD's Quarterly Chicken Wing Prices

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.