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Show Me The Love, Ben!

The US Dollar Index is building bullish “Trade” momentum in my models, and needs to follow through here with fundamentally based Bernanke backing.

On July 14th, both the S&P 500 and US Dollar were in dire straits, testing new lows for the year respectively. Since, the US Dollar has rallied +2.8% to 73.82 today, and now it’s making a new 6 week high versus the inflated Euro, which has come in sharply in the past few weeks to 1.55.

Hawkishness will beget further bullishness in this “Trade”. It may depress some Wall Street bankers, but it will impress my savings account. The US Dollar has had as high a positive correlation to the S&P 500 as any macro economic indicator on my screens as of late.

Raise rates, strengthen the US Dollar, and break inflation’s back, Ben.

KM
  • US Dollar Index Chart, Building The Love
chart courtesy of stockcharts.com

MGM: IT’S NOT ABOUT OCCUPANCY

As predicted in my 7/30/08 posting “MGM: Q2 DOESN’T MATTER BUT EVERYTHING ELSE DOES”, MGM’s Q2 was not that bad. My issues continue to be prospective of Q2. Operationally, ADR’s and slot revenues are the metrics to watch to gauge the true health of the business. The trends there are not good. In Q2, MGM’s slot revenues declined 10% and ADR’s fell 5%. I believe these metrics will continue to deteriorate, especially room rates.

The company missed EBITDA and EPS estimates only slightly so the stock is up 6%. In its press release, management played up the occupancy stat as an indication of strong demand for the company’s Las Vegas properties. It’s funny how when times get tough occupancy becomes the selling point to investors. News flash: occupancies are always high in Las Vegas. Strip hotels will do anything to fill their rooms because they need to leverage that big fixed cost asset known as the casino. As I’ve written about extensively, room rates will always be sacrificed.

Real demand as measured by room rates and slot revenue is deteriorating. Unfortunately for MGM, these are also the two highest margin revenue drivers on the Strip.

"Real" demand in decline

European Retail Sales Get Ugly

It’s a trailing economic data point, but is it ever an ugly one. Retail Sales for the Euro Zone for the month of June were the worst since the data started to be compiled for the region in 1995.

Yes, in context, we economic historians have to remember that the 15 member Euro Zone region does not have aggregated data that spans across decades. This of course is a major problem, when we look to compare their consumer spending cycle, in the aggregate, with that of the 1970’s. Regardless, at -3.1% year over year (see chart), this June report needs to be respected, particularly if it a leading indicator of negative US consumer spending months and quarters to come.

KM
Research Edge Chart by Andrew Barber, Director

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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”.

KM
  • PSE Composite Chart - Round Trip!
chart courtesy of stockcharts.com

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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