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SCARY MACRO CHART FRIDAY

Personal consumption expenditures have been a rocket ship over the past 20 years. Gaming revenue growth has been even more impressive. Gambling spend accelerated from 0.3% of PCE in 1990 to a peak of 0.94% in December, 2006. The trend broke soon after that all the way down to 0.79% in June of 2008. As a point of reference, if gambling reverts to the mean since 1990 of 0.6%, revenues would fall by $20bn annually or 25% of the current level. This trend could be a double whammy in a consumer slowdown.

Gambling % of PCE rolling over

I Bought The US Market This Morning... No Joke

My Compliance Officer thought it was a typo, but I did in fact BUY the S&P 500 (SPY) this morning. This US Dollar strength is going to beget the long side of the US market "Trade", at least to the target level that I issued yesterday of 1299.

Keep a "Trade" a trade however. Commodities down, inflation down, will be the squeeze "Trade" that the Street cannot ignore.
KM

Chart Of The Day: US Dollar In the End Zone!

I flashed this chart earlier in the week when the US$ was at the "goal line". It's not anymore. It's in the end zone. And it's bullish - big time.

My critical resistance level was 75.08, and the US Dollar Index is trading comfortably above that now at 75.77, up a whopping +5% since July 14th (when the S&P 500 hit an intraday low of 1201).

Dollar up, Euro down, Commodities down, inflation abates... I like it, for a "Trade".
KM
  • US$ Breaking Out
(chart courtesy of stockcharts.com)

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What’s Bearish for Wheat Prices is Bullish for PNRA

Wheat prices were down 7% in the month of July and are now down over 35% from the peak levels seen in March. And, we could see further pressure on wheat prices according to the International Grains Council (IGC), which recently raised its 2008/09 production forecasts by 4 million tons to a record 662 million tons. This production number represents a nearly 9% increase off of 2007 levels and is higher than the current world consumption projection, which stands at 639 million tons. The IGC attributes this increased forecast to improved prospects in the EU, the CIS, the U.S. and Australia.

Franchisee Bankruptcy Risk Emerges

Consistent with our bankruptcy theme and my comments from the bankruptcy conference call that the biggest risk to the QSR companies is franchisees going bankrupt, Midland Food Services, LLC, one of the largest Pizza Hut franchisees in the U.S. filed for Chapter 11 bankruptcy earlier this week. YUM is particularly exposed to this franchisee risk due to the massive amount of stores the company has sold over the last five years (YUM has a target to reduce its company ownership mix to below 10% by 2010 from about 20% currently and nearly 30% in 2002). Franchisees have used significant leverage to buy stores, which already puts them at greater risk. Making matters worse, YUM’s U.S. company-owned store base has recently experienced significant margin declines. KFC has been particularly weak recently, and chicken prices will only be moving higher.

Another phrase that will join the list of commonly used phrases by the restaurant industry is “the health of the franchise system.”


Good As Cash?

At least that’s what some of the brokers at UBS, Citigroup, and Merrill used to say – these auction rate securities are “as good as cash”. When you lie to people, it usually catches up with you. That’s what we started seeing yesterday with Citigroup’s $7.3B settlement where they agreed with the SEC to “make investors whole.” John Thain’s alleged exposure here is another $10B, and UBS somewhere between $20-$25B (yes, billions).

Of course, not all of these people flat out lied, but at a bare minimum they were unaware of what they were selling. Being unaware doesn’t work when you are managing my money, and I assume that is a general statement I can make for Main Street America. Your cash remains king. Letting other people get rich off of incentive fees on your cash… well… not so much anymore.

It’s one thing for Wall Street to have compromised the long standing trust they were assigned as America’s fiduciary. It’s another altogether for global investment banks to no longer trust each other. One of my first year analysts, Zach Brown, asked me a very simple question yesterday – “what can my Mom get for LIBOR?” Now that’s a much better question than hedge fund A, B, or C is asking their favorite CFO at a hotel conference “one on one”. What’s the point in asking CFO’s macro questions anyway? LIBOR is marked to market daily, and you can take out the “body language” risk!

This morning 3 month LIBOR (the rate at which banks lend to each other) is trading close to its highest spread over the US Fed Funds rate since 1999. Zach was the sailing captain at Yale last year. When the waters are rough, he knows how to manage risk. He doesn’t need me to make him “aware” of what spreads widening means.

Getting back to your cash – the waves in the global currency markets have heightened materially this week. I have an 85% position in the US Dollar, and that looks to be the one currency that is afloat. The rest of the world’s currencies need some Dramamine!

At 75.35, the US Dollar Index has charged forward by +4.9% since July 14th, and looks to be finally breaking out of its long term base. Since it’s an Index, the other side of the “Trade” is a collapse in both the Euro and the Japanese Yen that are trading down to 1.51, and 110 versus the US$, respectively. It doesn’t stop there. Asian currencies are getting clocked (yes, growth is slowing – China’s stock market was -4.5% last night, ahead of the Olympics), and currencies levered to commodity deflation are under massive selling pressure. The Canadian Dollar is down to 1.06 after trading at parity for most of 2008, while the Australian Dollar is having its 9th down day in a row – it’s longest losing streak since 1980!

Within their “it’s global this time” investment banking narrative of October, 20007, bankers don’t need one of these super secret “one on one’s” with a CFO who runs a global business to tell them that stagflation is bad. This morning’s facts are all on the table: Italy reported a negative GDP number, Czech Republic printed an accelerating inflation number for July (wage inflation!), and Egypt raised rates by 50 basis points to 11% after seeing their year over year inflation spike to +20%.

I know, I know… who cares about Egypt, LIBOR, and Cash? I think a better question is who is managing your cash in this interconnected global economy? If you think the "Tech Bubble" settlements were bad for Wall Street, wait until the lawyers get their nails under this moldy rug.

Have a great weekend,
KM



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