Philippines Inflation Running Rampant

The Philippines reported another nosebleed inflation number for the month of July today, at +12.2%. Since their central bank interest rate is still under 6%, they’ll need to raise rates further, or risk a wage spiral.

Unlike here in the US, wage inflation in Asia is a major problem. While the commodity component of July inflation has deflated, the wage component of the Asian equation continues to accelerate. This is a secular “Trend”, not a cyclical one.

Whether or not the Philippines PSE Composite Index has priced in this wage spiral risk is obviously the question from here. Since October 8, 2007, the Philippine stock market has lost -33% of its value (see chart below), and remains comfortably in it’s down “Trend”.

  • PSE Composite Chart - Round Trip!
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TSN - Acting Rationally

US - Officials in Buffalo are reported to be devastated by the announced closure of one of the town's largest employers as Tyson fails to renew its contract with Petit Jean. The Petit Jean Poultry plant in Buffalo will close by 4 October, eliminating about 465 jobs in Buffalo (population about 3,000), reports News-Leader of Springfield, Missouri.

CBRL – Top-line trends are stabilizing

CBRL’s July same-store sales were down 1%, driven by a 3.9% increase in average check and a 4.9% traffic decline. On a two-year basis, comparable sales were up 0.3% in July from a slightly negative number in June. Although these results are not good, it does show that top-line trends are stabilizing. Additionally, the company’s full-year same-store sales result of up 0.5% met CBRL’s updated guidance provided in early July.

CBRL’s 4Q comparable sales number of down 0.8% highlights Brinker’s Chili’s outperformance, which reported an acceleration in same-store sales growth trends this morning for 4Q, up 3.4%.

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Leapfrog reported a very nice quarter last night. Virtually all key metrics turned positive or confirmed a positive trend. Revenues grew for the first time since Q2 2005 and average inventory days outstanding shrunk for the 3rd straight quarter. The margin picture looks good as well. Gross margin expanded 310bps in Q2 and the SG&A ratio declined 11.5%. EBIT margin increased for the 3rd straight quarter, up 22%.
  • Clearly, management’s long-term strategy and implementation is finally paying off. We introduced LF on our portal in our 6/26/08 posting “LF: A HOP BACK IN ITS STEP” and the company hasn’t disappointed. New products (with higher margins) are off to a great start, impacting revenues about a quarter earlier than expected. Tie ratios should improve gradually, driving gross margins higher. After years of heavy SG&A spend, the company can now dial that down a bit with the exception of advertising. Consistent with Q2, accelerating sales will leverage SG&A nicely.
  • Despite the strength of the quarter, management left its guidance unchanged for the year. The bears will say that sales were just pulled forward into Q2. I disagree. Management is being appropriately conservative given the consumer environment. Don’t be surprised if they continue to beat their guidance though. LF is probably less dependent on the economy given the fully revamped and reloaded product offering. They’ve barely scratched the surface with their new products internationally. That’ll change in the back half of 2008. Domestically new products are still being rolled out with significant advertising support.
  • Concentrating the long side of your consumer portfolio on names less tied to near term economic factors like LF seems to make a lot of sense in this environment.

Ben's Spinal Tap

One by one, all of the asset bubbles perpetuated by politicized central bankers and levered long investors alike are popping. Commodities from copper to soybeans, to everything CNBC’s “Fast Money” was flashing that you load up to the gills with in May – pop, pop, bang!

“Demand Destruction” quickly became the bull market narrative (crude down, stocks up), but that seemingly has not played out. How much of the pain trade can they hold the line on here in August? Who flinches first? Who do you trust? Those would be three questions I’d start with this morning as we head into Bernanke’s inevitable painting of both sides of the political fence today.

This is why I moved to 85% cash at S&P 1284 last week. Realizing full well that that positioning doesn’t get the asset management community paid on the management fee side of their existence, I’m ok with that. I protect my family’s hard earned capital over Wall Street’s compensation structures. At a young age, when I left home to play hockey, I trusted my left hand to shoot the puck, and my right one to throw a fist. Wall Street has proven to throw people under the bus as regularly as a pro scout would if you broke your leg – be careful who you trust out there. Trust your own work, stand up for yourself, and live to play another day. Your cash is king.

That “cash is king” phrase is more than something catchy that I was taught on the trading floor at Credit Suisse First Boston in 1999. The US Dollar is trading at a 6 week high this morning versus the Euro, and currencies levered to commodities deflating (Aussi, Canadian, Russian, etc…) are getting hit hard. If you are in cash, and that cash is US$ denominated, your august performance is off to the relative performance races.

Ben Bernanke’s rhetoric this afternoon holds the keys to the US Dollar, your home, and your portfolio’s fate. The big immediate “Trade” lower in everything commodities is behind us. In order to establish deflation as an intermediate “Trend”, Bernanke needs to step up the hawkishness and get people to actually believe that he is not going to behave like the “Helicopter Ben” cartoons we’ve been posting. Crude, Gold, and Commodities trading at $119/barrel, $892/oz, and 401 (CRB Index), respectively, is not going to break open my wallet to start buying stocks again. Crude, Gold, and Commodities closing under $103.51, $859, and 382, will however. C’mon’ Big Ben! I’ll call you “Big Brown” and drop the “Helicopter” stuff if you show some spine here.

In the meantime, Asian investors ran for the exits again overnight. “Demand destruction”, of course, is a horrific thought if you’re a “growth” investor. I am thankful that we sold our China long position. Chinese stocks broke my short term momentum indicator overnight, closing down another -1.9%, and stocks in Hong Kong did the same, trading down -2.5%, through my critical support level. Indonesia raised rates to 9%, and stocks there fell another -1.9%, while the Philippines reported a July inflation rate of +12.2% year over year – a 16 year high.

Asian growth is slowing. “Trend” line inflation in Asia is accelerating because wage inflation there is secular. Wage inflation was a critical component of the US Bear market in the 1970’s because ¼ of Americans were part of a union. That clearly is not the case today, but stocks don’t trade on today, or yesterday – they trade on the prospects for tomorrow… and if Obama has anything to do with it, US wage deflation won’t be what I am writing about next.

Good luck out there today,


Ameristar Casinos issued its Q2 earnings release and it couldn’t have been easier to predict. Similar to virtually every other quarterly release in the sector, Q2 Adjusted EPS met reduced estimates but exceeded GAAP EPS (see my 8/4/08 posting “ADJUSTED EPS: TAKE THE GOOD, LEAVE THE BAD”). Q2 revenues missed expectations but SG&A made up the difference. Layoffs were, of course, announced. Finally, ASCA implicitly lowered expectations for the rest of the year. Our summer interns could’ve predicted the contents of this release right down to the number of terminated employees.

So where does this leave us? ASCA is an economically sensitive stock with few catalysts. The positive catalysts that do exist are related to November state referendums: table limit betting increase in Colorado and the loss limit removal in Missouri. There are other ways to play those catalysts. The downside catalysts are more numerous: The economy and gas prices, a leveraged balance sheet and big debt maturities in 2010 ($1.3bn), and new casinos in Kansas and St. Louis. Let’s not forget the near term biggie: the hit on Ameristar East Chicago from the massive expansion and renovation of the Horseshoe in Northern Indiana.

PENN is not without its own economic vulnerability. However, I keep coming back to liquidity. To me liquidity is the single most differentiating factor in this struggling industry. Why would I pay the same multiple for ASCA as I would for PENN, the gaming company with the most liquidity, run by the best stewards of capital. PNK also looks more attractive at a 0.5-1.0x multiple discount and a buffer from the economic environment due to its Texas exposure. For those targeting ASCA as an acquisition candidate; that may eventually be the case but it likely won’t be PENN on the other end of that transaction. If PENN is buying any company it will be PNK.

If ASCA can raise $500m in sub debt this year liquidity runs dry in 2010. If they can't....

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