US Consumer Sentiment Continues Track Employment

This morning's weekly ABC/Washington Post consumer confidence reading reverted to its negative "Trend" line. This correlates positively with the sharp downward movement in last week's US jobless claims. Both have an inverse correlation with rising US corporate and personal bankruptcies.

At -49, the ABC confidence readings look primed to test their all time lows. This week's negative move is more negative if you consider that this occurred in the face of dropping oil prices.


Happy Days

Shark jumping at the top of this US market’s downward “Trend”, and bedlam at the bottom. That’s a borrowed “Happy Days” line that I have been using, and boy did we see some bull sharks bloodying the short selling waters yesterday. That was the biggest rally we’ve seen since April. Volume was strong; breadth was impressive. The S&P 500 closed at 1284, right back at the level where I moved to 85% cash.

If you handed me Bernanke’s transcript before the FOMC release, I would have moved to 95% cash. Obviously that would have been a mistake for an hour or two of post communiqué trading. Thankfully, nobody did! Despite his opting to pander to the political winds, and do nothing but keep the easy money card in play, the US Dollar held its august to date gains, as did US Treasury yields. Commodities markets didn’t stop going down either – the CRB Commodities Index closed down another -74 basis points on the day at 398. It was a very impressive day for the bulls.

With small caps racing higher, and US Consumer Discretionary stocks posting a +6% day, we have to respect the effort out there from those who think they’ve called the US market bottom. My models spit out new ranges after every 90 minutes of market trading. At yesterday’s close, I moved to an S&P downside target of 1231, and an upside one of 1292. If you are going to play this game fully invested, I think you should trade this range, aggressively.

In terms of consensus expectations, the facts have changed materially in the last 3 weeks on two fronts: Inflation and Growth. Commodities driven inflation has deflated to the tune of -15.7% from its early July high (CRB Index), while worldwide growth expectations have deteriorated materially. In the US, the most relevant flashing amber lights on my screens are the emerging bankruptcy and unemployment cycles. Globally, Asian growth stats continue to deteriorate. Japan’s Finance Minister, Bunmei Ibuki, held a press conference overnight walking through his newly found economic “forecast” for guess what? “Stagflation”. Now we have the top 2 economies in the world stagflating. That’s not good.

Trading this global tape has not been as easy as the US Federal Reserve’s monetary policy. From here, I think you’ll do just fine fading the high end of my trading range and getting longer at the low end. However, the best positioning will remain the concentrated in cash one.

The US government and banking system alike has not given me any reason to believe them, or that they have a proactive process that will allow them to protect against downside tail risk. This is most obvious in Bernanke’s tag line forecast that the Fed is "expecting inflation to moderate.” He has used this line in the FOMC statement since August 2006!

As the facts change, I do. While the aforementioned facts related to inflation and growth have changed, this alarming “Trend” of a politicized US Federal Reserve has not. Like global stock market investing, Fed watching has become a mania. Manias generally don’t end well. As this one’s confusion continues to manifest itself via volatile trading waters, I’m happy to be on the shores, watching the sharks jump.

Per our friends at Wikipedia, Shark Jumping “is an allusion to a scene in a 1977 episode of the TV series Happy Days when the popular character Arthur "Fonzie" Fonzarelli literally jumps over a shark while water skiing. The scene was considered so preposterous that many believed it to be an attempt at reviving the declining ratings of the flagging show.”

Best of luck out there today,

MSSR – Eye on Operating Leases

MSSR is scheduled to report 2Q earnings tomorrow after the close and I would expect results to be less than pretty as the company does not begin to lap easier comparisons from a same-store sales and operating margin standpoint until 2H08. That being said, the street is forecasting a 55% year-over-year decline in 2Q EPS so expectations are not high.
  • As of its 1Q earnings call in early May, the company stated that it had seen Friday and Saturday dinner comparable sales stabilize after posting very negative same-store sales on those two days beginning in mid-February. Management did go on to clarify that relative to stabilizing sales on those two days, “that the group is not eroding as quickly as it was before,” which sounds less than positive. According to NPD data, the fine dining segment (includes MSSR) posted the biggest traffic declines in the March-May 2008 time period, down 4% relative to casual dining up 1%. NPD also reported that the dinner day part was the weakest segment across all restaurant categories which does not bode well for MSSR as dinner sales accounted for 75% of the company’s 2007 sales.
  • MSSR’s operating margins fell over 500 bps YOY in 1Q to 0.5% (among the lowest reported in 1Q08 for casual dining operators) and close to 450 bps sequentially from 4Q07. Management attributed these significant margin declines to a deleveraging of commodity and labor costs as a result of lower comparable sales and to there being a larger proportion of newer restaurants in the company’s portfolio, which are not as efficient at managing food and labor costs. Management expects to see an improvement in margins in 3Q and 4Q (which matches up from an easier comparison standpoint) as they become more efficient in labor scheduling and drive higher average checks from their menu focus on wild species (which generate higher price points) in 3Q.
  • Relative to the company’s development pipeline, MSSR still expects FY09 unit growth of 13%-15% on top of its 15% unit growth forecast for FY08. Management stated, “we have sought and in some cases received additional concessions from our landlords on charges and even more favorable rent terms for the 2008 and 2009 signed lease.” According to MSSR’s 2007 10-K, however, the company’s future operating lease obligations are up relative to its minimum rent expense in 2007 (in the 10-25% range), which is concerning as it relates to company margins going forward. For reference, as of their most recent 10-Ks, DRI and EAT are subject to operating lease obligations that decline each year.
MSSR's Operating Lease Obligations Relative to 2007 Expense

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%

FOMC Decides to Pander, Again

Pandering to the political wind is as consistent a "Trend" at the US Federal Reserve as their call on "expecting inflation to moderate" (which they've been "expecting" since August 2006!).

"Downside risks to economic growth remain" is still the party line. Gee, thanks for that revelation Ben.

There will be more risk to the US economy tomorrow, and the day after that, as a result of this spineless rhetoric.

Sellem' if you havem'.

The Other Side of FX Risk

Before we even see the bulk of FX translation risk play out, organic sales growth is starting to tank. Add this to even greater cost pressure than in the US, and this is not good for Europe.
  • Yes, FX risk is important. In fact as I’ve recently noted, I think that a strengthening dollar will ultimately expose the broken margin structure for many companies in this industry. But let’s not forget the actual organic sales growth outside of the U.S. either. Euro-zone retail sales were down 3.1% in June. As far as I can tell, that’s just about the lowest number since the Euro was born.
  • As I highlighted in greater detail in my 7/25 ‘Trouble Brewing in Europe?’ post, Europe appears to be feeling a disproportionately higher import cost hit on raw materials than the US to higher dependency on China. Keep in mind those companies with significant European exposure. Things can turn… FAST.
This is one scary retail sales chart. Euro-zone retail sales yy change.
Exposure to Europe varies meaningfully by company.

EAT – Brinker Sees Bankruptcy Cycle Continuing

EAT management commented on its conference call today about the current environment as it relates to Bennigan’s recent filing for Chapter 7 bankruptcy protection and the subsequent impact on supply within the industry. They not only recognize bankruptcies to be good for the industry, particularly the bar and grill segment, but they also see more competitors going away.

Bankruptcy is good for the market share leader so Brinker should have the biggest opportunity to capture incremental share as supply comes out of the market. To that point, management stated that it is already seeing an uptick in sales and traffic in those restaurants that are located next to a Bennigan’s that has closed.

Management comments:

“I think bigger than that is the transformation that you’re seeing in the industry, and that it used to be situations like that, companies went from some kind of financial straights to chapter 11, and just never stopped opening their doors, but certainly changes in debtor and possession or debt financing has made it much better for brands like ours as these brands are going away and that’s a positive because that takes supply out of the industry, and I think everybody has been looking for a correction in supply, and I don’t think this is the first. We have seen a lot of restaurants here in Dallas, some at the higher end, some of the lower end go away, and I’m sure if you look around the city you’re in, you’re seeing similar situations. So supply is starting to rationalize itself which a good thing for us in the grill and bar segment and it’s a good thing for restaurants overall especially if you’re well capitalized and have a good balance sheet.”

“There will be a lot more private single mom and pop restaurants going away and will be some more chains going away as well because the cost side is just too onerous right now, and that’s why the things we’re doing in our restaurants this technology hospitality, part of it is trying to figure out how to make the P&L better as well. Part of it is trying to figure out how to make more money and provide faster food experiences and better guest experiences.”

“I think you’re starting to see some of those weaker competitors go away, and they’re going to go away for good. That’s the best news of all. So I think the supply cycle is getting better. I think we’re improving ourselves in the sales cycle of casual dining, but I wouldn’t say that it’s getting ready to take off.”

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