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MGM MANAGEMENT: SOOTHSAYERS OR HOPEFUL AGNOSTICS?

MGM got some investors juiced and shorts scared with its conference call commentary yesterday. Management proclaimed Q2 the trough and declared that Q4 would show improvement and be the strongest quarter of the year. Forward bookings were cited as driving the Q4 and 2009 optimism. What? Visibility past 1 quarter has been notoriously cloudy in this business, even in boom periods. Looking back just a few quarters shows the fallacy of these predictions. During the Q3 2007 conference call, management declared that into 2008 “you should expect to see a fairly substantial increase in revenue and a resulting improvement in margins”. Check out the following chart to see how that forecast worked out. I’m not highlighting this to call out management for being wrong. I’ve been wrong many times. Rather, I’m simply suggesting that management doesn’t know what Q4 will bring.

Booking windows in Las Vegas are short even when times are good. They are even shorter in a consumer slowdown. Strip casinos, especially high end properties like Bellagio and MGM Grand, generate much of their profits in the last week of the year. That week is notoriously unpredictable. Unless management discovered some groundbreaking forecasting tool, I’m not buying it. Just as they lack visibility into Q4, I also cannot see that far. However, we are data dependent here at Research Edge and the data supports continued weakness. Hotel and slot trends are moving in the wrong direction and critical factors such airline capacity, airfares, travel, consumer spending trends, etc. suggest that they will continue to do so.

MGM's last prediction didn't exactly work out

Hershey Swirls (HSY), For the Shorts...

HSY had the sharks jumping today, closing +7% on good volume. This stock is up +24% since the "Event Driven" community blew it out into their June month end (HSY didn't get LBO'd, remember).

I've been riding the highway to Hershey Park for the better part of the year, and I've taken my share of emails from the folks who are probably covering it up here. If you've been on the strong side with us, I think you sell some over $40, and buy it back at $38.37.

Buy Low, Sell High.
KM
  • HSY: buy it back closer to $38.37
(chart courtesy of stockcharts.com)

Ralph Lauren (RL): This Short Squeeze Isn't Over

Shame on me and shame on you. When I first started working with Brian McGough, I was short this stock. Today, our Advisory Clients are long it, and the shorts are still talking about the height of Polo shirt piles at Bloomingdales.

Qualitative short thesis’ will get you about as far as I can throw you in this business, particularly when you're shorting a stock that has 18% of the float sold short like RL does.

Closing +7% today on 6M shares traded is your wakeup call. Next stop on this bus is $66.84, before it takes a breather, then charges to $71. Great quarter, and great call by McGough.
KM
  • RL is going to $66.84, then $71.11
(chart courtesy of stockcharts.com)

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Bears Run For The Bushes: Volatility (VIX) Gets Smushed

If sharks we're jumping at their backsides, Bears wouldn't touch the water. That's what is happening out there again today. Bears are running for the bushes again, covering their shorts at the top of my range, and the VIX tanks for a -4.5% down day.

The reversal in the VIX is a bullish and material one that should be respected. Breaking down and closing below my critical support level of 21.49 was today's noteworthy event, closing at 20.18.

Look for the sharks to be jumping at anything that has short interest below that major "Trend" line of resistance.
KM
  • VIX Breaking Down Through 21.49
(Chart Courtesy of Stockcharts.com)

Chinese Wage Inflation Isn't In the CRB

Inflation is unfortunately a more complex calculation than straight lining changes in commodity prices. The main reason why Asian inflation reported so far in July was up sequentially, despite commodities selling off, is wage inflation (see chart).

This is a secular "Trend" that needs to be understood. Particularly as the masses stare are the swan dive in commodity prices, which as of tomorrow, will be yesterday's news.
KM
Chinese Wage Inflation (Research Edge Chart)

RT – The Joke That Nobody Gets

Earlier this week, I wrote about RT’s media push around its intention to blow up one of its “old” Ruby Tuesday restaurants and broadcast it online. This broadcasted demolition was part of the company’s marketing campaign to highlight RT’s new, reimaged brand, which follows its massive remodel program. Following the explosion, RT posted a letter (posted below) on its website saying that due to all of the “sameness” within the casual dining segment that it mistakenly blew up Cheeky’s Bar and Grill restaurant rather than one of its own Ruby Tuesday locations.

I thought the initial public demolition was ridiculous (please refer to my posting from August 4), and the posted apologetic letter even more ridiculous. Then, this morning I saw a new RT commercial which shows RT’s SVP of marketing communicating the exact same thing as the posted letter while a television in the background broadcasts the explosion (you can view the commercial at RubyTuesday.com). I am now only wasting all of your time with this ridiculousness because this is just bad marketing and will not help RT’s already deteriorated top-line.

RT’s prospective customers (the group most ad campaigns target) will not get the joke because they have most likely never been to an “old” Ruby Tuesday so the fact that there is a lot of “sameness” in casual dining will not convince them to run out and eat at a casual dining restaurant.

RT’s former loyal customers have already proven that they feel alienated by the company’s recent reimages as evidenced by recent traffic results so the commercial will only remind them why they stopped going.

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