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DRI – REAL TIME COMMENTS

Going into the quarter, we said investors would be most focused on the read-through to current industry trends and on DRI’s outlook for seafood costs.

 

Management’s industry comments:  Industry same-store sales dynamics continued to improve during the quarter with guest counts -3.2% and average check +1.8% (first time positive in fiscal 2010).  Guest counts improved 90 bps sequentially from the prior quarter and average check improved 190 bps.  “Stepping back even further, same restaurant guest counts and sales during the fourth quarter marked the best industry performance in roughly two and a half years since the first quarter of our fiscal 2008.”

 

The higher average check is evidence of the reduction in deep discounting.  The current cost environment will not afford companies the ability to discount to the same extent as in prior quarters; promoting effective price points is still important.  Industry trends should continue to improve; though not too dramatically.

 

Despite Darden’s somewhat favorable industry outlook, investors don’t seem convinced.  What we know for sure today is that Darden’s trends slowed during the quarter, and for the most part, two-year average trends decelerated further in May.


Seafood cost comments:  The company sources some of its seafood from the Gulf, but all seafood, with the exception of oysters, is sourced from areas not yet affected.  The large majority of the company’s seafood is sourced globally and they are not yet seeing and don’t expect to experience big changes in availability and costs. 

 

Management expects seafood costs (30% of total food and beverage costs) to move slightly higher in fiscal 2011 due to increasing global demand.  DRI is covered on its shrimp (its highest volume item) and crab usage needs through 4Q11 at prices that are in line with FY10.  The company is contracted on lobster through calendar 2010 at favorable prices, but expects these prices to move higher in calendar 2011.

 

Total food and beverage costs are expected to be favorable in the first half of the year, but should level out in 2H11.  Specifically, management stated, “Our supply chain related cost savings initiatives and relatively stable commodity prices should contribute to lower food and beverage expenses as a percentage of sales.  We have many of our products contracted to the end of calendar 2010, which I will discuss in detail shortly here.  So we have about six months of full visibility on our costs.  There is less visibility beyond calendar 2010 in part because really we believe some commodities will continue to experience cost erosion as supply exceeds demand and we want to be in a position to benefit from that decline.”

 

Additional FY11 Guidance:  Management stated that the 2%-3% same-store sales guidance is expected to be driven by a 2% price increase, with traffic and mix contributing positively for the year.  As I said earlier, this guidance seems aggressive, given the slowdown in 4Q10 trends, as it implies continued improvement in 2-year average trends.


Darden expects the industry to continue to improve gradually with same-store sales coming in -1% for the year.  To that end, management is expecting its relative outperformance to widen to closer to 3.5% from 2.5% in FY10.  Darden’s outperformance, however, narrowed during the fourth quarter to 0.5% from closer to 5% in the prior quarter.  Darden attributed its weaker than expected same-store sales growth during the fourth quarter to promotional weakness at both Olive Garden and Red Lobster during April; trends were better than expected at LongHorn. 

 

The company expects to buy back $300 to $350 million in shares in FY11 versus $85 million in FY10.

 

Notes from the earnings call:

 

Sales

  • 13 wk vs 13 wk, sales would have been up 1% year-over-year
  • Knapp ex-Darden same-store sales were down ~1.4% for the quarter
  • Recognized a $12.7m reduction to revenue in gift card breakage
    • Non cash charge
    • Recognized across all brands
    • Not reflected in sss results

Margins

  • Comparing margins on a 13 wk vs 14 wk basis
  • Food and beverage expenses were 81 bps lower than last year
    • Benefitted from declining commodity costs in 2H
    • The sales deleverage created by the gift card correction adversely affected food and beverage expenses by 20 bps
  • Restaurant and labor expenses were 47 bps higher than last year
    • Wage inflation
    • The sales deleverage created by the gift card correction adversely affected labor expenses by 22 bps
    • The sales deleverage create bid the gift card correction adversely affected restaurant expenses by 10 basis points.
    • The sales deleverage created by the extra fiscal week in the prior year adversely affected restaurant expenses by 35 bps.
  • D&A expenses in the quarter were 41 bps higher year-over-year
    • The sales deleverage created by the extra fiscal week in the prior year and the gift card correction adversely affected depreciation expense by 25 basis points.
  • SG&A expenses were 24 bps lower as a percentage of sales

 

 

The effective tax rate for the fourth quarter was 26.2% and the annual effective tax rate was 25.1%.

DRI repurchased $85 million of company shares for the year and $1.19 billion over the past five years.  8.3 million shares remaining in repurchase authorization.  Consistently generating strong cash flows.  Annual dividend is $1.28 per share, an annual increase of 28%.

 

OG

  • OG same-store sales were down 0.8%, 60 bps above KNAPP track.
  • OG softness was promotion-related (lapping last year).  Once promotion started in mid-May, sales improved significantly

RL

  • RL same-store sales declined 1.7%
  • 30 bps below KNAPP track.
  • Comping a difficult period
  • Lent started earlier this year than last year
    • Negatively impacted sales results compared with prior year
    • Impact to April was greater than had been assumed

LH

  • 2.3% growth, exceeding KNAPP by nearly 4%
  • Industry outperformance accelerated in May

 

The three concepts, blended, still outperformed the industry in 4Q.

FY11 Priorities

  • Continuing to build strong brands
  • Brand support platform to further enhance margins and sales
  • Red Lobster accelerating Bar Harbor remodels from 50 units last year to 100 in the current year

Oil Spill

  • RL sources from the gulf, but none from areas that have been affected
  • Source seafood globally
  • Don’t expect a meaningful adverse impact

Longhorn

  • Sharper brand definition, advertising, promotions have led to success
  • Adding more cravable items to menu in 2011
  • Continuing remodels of ranch house units
  • Opening 20-25 new restaurants this year

Three core projects:

  • The automation of the supply chain
  • The centralization of our facilities maintenance support
  • The adoption of more sustainable in restaurant operating practices related to energy, water, and cleaning supplies
    • All on track to meet or exceed the cost reduction targets we have discussed with you in the past.  Combined, anticipating $10 to $15 million of incremental savings from these projects during fiscal

Capital Grille

  • Outperformed peers with 6.9% same store sales growth
  • New software will allow teams to recognize the most loyal and frequent customers
  • Opening 4 new units in FY11, including first two locations in Southern California

Bahama Breeze

  • Outperformed KNAPP by 230 bps with same-store sales of 0.9%
  • Bahama Breeze will open one unit in FY11 and four in FY12

Season’s 52

  • AUVs for 2010 was $5.9m
  • SSS were -0.2%

Outlook

  • Outlook based on SSS in three main concepts of 2-3%
    • Traffic  and mix positive
    • 2% pricing
  • 70-75 restaurants
    • 4% unit growth
    • 3.5% operating weeks growth
  • Sales increase will be 5.5% to 6%
  • Capex will be 475m to 525m vs 432m in 2010
  • Operating profit margins will be 70 bps to 100 bps expansion
    • Benefit s from food and beverage in 1H, leveling out in 2H
  • Others (SG&A, D&A) will be relatively unchanged
  • 6 months of visibility in costs
    • Believe some commodities will continue to decline
  • Seafood slightly higher than 2010 in 2011
    • 30% of food and beverage costs
    • Coverage thru 4Q 2011 for shrimp and crab
    • Lobster covered through calendar 2010
  • Beef prices are lower and DRI have extended coverage to January 2011
  • Chicken, poultry prices are higher year-over-year
    • Contracted through December 2010
  • Energy costs expected to be lower year-over-year
  • Labor costs will decrease due to sales leveraging
  • Restaurant expenses will be flat due to cost saving initiatives and sales leverage
  • Tax rate for the year should be ~27%
  • Paying out 180m in dividends
  • Expect 300m to 350m of stock repurchase in FY11 vs 85m in FY10

 

Q&A:

 

Q:  On the outlook for the comps for fiscal 2011, what is giving you the confidence that you can reach that 2 to 3% goal? If you could put that in the context of what you have been seeing in recent months and how much improvement might be needed to get to that number? 

A:  Improving underlying industry trend is the first pillar there.    DRI started at -8% in 1QFY10, roughly -6% in 2QFY10 and 4% in 3QFY10.  DRI has seen an improving trend through the year.  Next year the discounting environment will not be maintained as much by low costs.

 

Q:  What was the underlying May comp adjusted for the fiscal calendar? June comps?

A:  We continue to look at the fiscal week basis, because that best explains our fiscal reported results, so that's why we use those. 

 

Q:  Could you elaborate a little bit on the charge that was taken in the period.  In Q3 was there a large breakage gain, and then that was adjusted? 

A: The charge relates to the breakage that we're seeing in the gift cards.  We have seen a dramatic increase in the redemption of those cards. ~60% of the adjustment we took in the fourth quarter relates to cards that are three to ten years old.  

 

Q:  On Red Lobster performance.  Any change in consumer behavior related to Gulf oil spill or are they just working through that?

A:  No meaningful change in consumer behavior other than us not selling oysters.

 

Q:  Red Lobster price point strategy?  Do you think that you found the right mix of price point/quality promotions? 

A:  The foundation of Red Lobster's promotional strategy as it relates to price points is to provide price certainty, is to provide a sense of affordability, and we did two this year in the second half, and they were in the 12 to $15 range.  

 

Q:  EPS growth outlook for fiscal '11, 1H vs 2H, you have pretty easy comparisons in the first half, and on a comps perspective the 2 or 3% comps target, is there a progression that we should assume throughout the year given the difference in comparisons on a quarter basis?

A:  For the coming year, there is a little progression from quarter to quarter, although not dramatic when you look at prior year comp.  More of a skew on the earnings to the back part of the year, particularly as you look at wrapping over the gift card charges that we mentioned earlier

 

Q:  On promotional weakness at Red Lobster and Olive Garden in the quarter, do you expect to be more aggressive around price point advertising next year?  Marketing expenditures overall next year?

A:  Don’t want to enter into too detailed a discussion.  In terms of investment in marketing, the biggest thing to note would be an increase in media support for LongHorn.

 

Q:  On the commodity outlook, at the analyst day you gave specific numbers in terms of the inflation targets for fiscal '11. Can you update us on that number and how it may look in the first half versus the second half?  And clarify your shrimp comments; you said you were locked on prices through the end of fiscal '11?

A:  Yes, we are locked on our prices on shrimp through basically the end of our fiscal 2011.  Not a whole lot has changed from those planning assumptions from the analyst day.  Overall inflation rate on cost basket of about 1.5% - the food portion of that being about a quarter of a percent to a half a percent, so a fairly modest cost environment there.  No dramatic first half to back half of the year differential.

 

Q:  Are you seeing food costs impacting the promotional environment, or is that something you expect to develop as inflation starts to flatten out later in the year?

A:  We’re seeing industry data showing a decrease in check reduction.  Price points being offered in promotions recently are not showing discounts as deep as before.

 

Q:  With your FY11 comps being the 2% to 3% versus group assumption of -1%, is there a bifurcation between the haves and have-nots especially in light of the CPK announcement?

A:  Some of the folks who have outperformed will continue to outperform because they have been disciplined.

 

Q:  Do you believe you have the appropriate rate of investment now for the remodels at Red Lobster?  What is the expected lift to same store sales from the remodel?

A:  Very confident about the remodel investment at Red Lobster and it is driving positive same restaurant sales I think in the 5% range. 

 

Q :  The state of the consumer with all of the events over recent weeks?

A:  I would say that the sales are very bumpy from week to week.  It reflects sentiment and there is a lack of confidence.

 

Q:  On advertising for LongHorn.  Is most of the ramp in that advertising going to be product specific, or will some of it be positioning the brand? 

A:  Needs to do both.  It needs to establish LongHorn as a great steakhouse.

 

Q:  What has changed with the high end brands like capital grille?  Are sales less bumpy?

A:  The biggest change has been the return of the business travel and entertainment spending.  We have seen our business improve Monday through Thursday greater than on the weekend. 

 

Q:  Guidance for the interest expense for this year?

A: Flat year-over-year

 

Q:  With the potential disruption in oyster supplies from the Gulf, what % of your menu would that affect or what percent of your mix would that affect?

A:  Less than two-tenths of a percent.

 

 Q:  On plans to pay off or refinance the $150 million note that matures in August.  Is some of the cash on the balance sheet earmarked for that?

A:  You're correct.  We ended the fiscal year with a strong cash balance and are planning to pay that off.

 

Q:  How do the brands do against their own segments, most importantly for LongHorn?  Is steak improving versus other segments in general, or is LongHorn even improving against steak? 

A:  The biggest competitor in steak is obviously outback, less visibility on same restaurant sales reresults at outlook, so difficult to answer that question.  It’s important to remember that it's a variety seeking category, and while steak is a category is competitive, people are moving between the brands throughout the year.

 

Q:  Service programs at Red Lobster and Capital Grille.  Can you talk about the adjustment at capital grill and also any adjustments to the Red Lobster service initiative given the Gulf situation?

A:  For Capital Grille, it’s about communication.  We're enabling technology to reach out to them and confirm the reservation.  Those are the types of things that we're working on.  At Olive Garden we’re trying to do a better job of quoting wait times and at Red Lobster it’s about tailoring service for guests.

 

Howard Penney

Managing Director

 


THE M3: MPEL; S'PORE HOUSING PRICES SLOW DOWN

The Macau Metro Monitor, June 24th, 2010

 

MELCO CROWN FOCUSES ON MACAU macaubusiness.com

CEO Lawrence Ho reiterated his focus on the Macau market, in particular CoD and investment opportunities in Macau.  Stressing management efficiency can increase profitability, even with fewer tables, Ho supports the government's decision to cap gaming tables. Melco currently has 100 tables less than it initially did. 

 

RATE OF INCREASE IN S'PORE HOUSING PRICES SLOWS DOWN channelnewsasia.com

The rate of increase in housing prices in Singapore slowed down in 2Q 2010, according to property consultancy firm DTZ.  DTZ attributes this to high asking prices and poor stock market performance.  The only exception was in the mass market segment where prices of secondary condominiums and apartments went up further compared to the previous quarter.  DTZ said the comparatively higher prices of new developments and aggressive bids for government land sales (GLS) sites in the suburban areas had a cumulative effect on raising the prices of homes in the secondary market.


Ms Chua Chor Hoon, Head of DTZ South-east Asia Research, noted that developers are likely to tone down their land bids in view of the unprecedented high number of suburban sites to be sold in the GLS in the second half. She said this will keep a check on prices of mass market homes going forward.


CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE

Jobless Claims Better Week Over Week, But Remain at a Level Inconsistent with Material Improvement

Initial claims fell week over week by 19k after upwardly revising the prior week by 4k, suggesting the actual improvement was 15k. More important to us is that the level of jobless claims - 457k - remains right in line with its trend year-to-date in the 450k-460k range. As a reminder, this level is too high for unemployment to materially improve. The level would need to be in the 375k-400k range by our estimates for unemployment to make real headway in the right direction. On a rolling basis, claims fell by 1.5k to 463k from 464.5k last week. On the margin, this morning's data is slightly positive, but it's only a small step in the right direction so we'll reserve our enthusiasm for the time being.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - rolling

 

Below we chart the raw claims data. 

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - raw

 

In the table below, we show the correlations of initial claims to U.S. equities. Consumer Discretionary (XLY) and Consumer Staples (XLP) have the highest inverse correlation on a one-year basis (r-squared = 0.76 and 0.75, respectively). Surprisingly, the Financials have the second lowest inverse correlation to initial claims on a one-year basis (r-squared = 0.40).

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - 1

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


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CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE

Jobless Claims Better Week Over Week, But Remain at a Level Inconsistent with Material Improvement

Initial claims fell week over week by 19k after upwardly revising the prior week by 4k, suggesting the actual improvement was 15k. More important to us is that the level of jobless claims - 457k - remains right in line with its trend year-to-date in the 450k-460k range. As a reminder, this level is too high for unemployment to materially improve. The level would need to be in the 375k-400k range by our estimates for unemployment to make real headway in the right direction. On a rolling basis, claims fell by 1.5k to 463k from 464.5k last week. On the margin, this morning's data is slightly positive, but it's only a small step in the right direction so we'll reserve our enthusiasm for the time being.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - rolling

 

Below the jobless claims charts, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  

 

In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - subsector correlation analysis

 

The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical. 

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - company correlation analysis

 

Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 

 

Below we chart the raw claims data. 

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - raw

 

The table below shows the stock performance of each subsector over four durations. 

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - price perf table

 

As a reminder, May was the peak month of Census hiring, and it should now be a headwind to jobs from here as the Census winds down.

 

CLAIMS LOWER VS LAST WEEK BY 15K NET OF REVISION BUT STILL WAY TOO HIGH FOR UNEMPLOYMENT TO IMPROVE - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


DRI – FIRST LOOK

DRI reported fiscal 4Q10 EPS of $0.86, or $0.87 when you exclude the $2 million pre-tax asset impairment charge, below both the street’s $0.88 per share estimate and my $0.90 per share estimate.  Relative to my estimates, the shortfall was largely due to lower same-store sales growth and higher SG&A and interest expenses. 

 

On a same-store sales basis, I was expecting sequential two-year average trends to hold steady to get slightly better in the fourth quarter, but instead, trends at the three major brands slowed when you adjust for all of the reported holiday and weather impacts in 3Q10.  Although Red Lobster’s trends looked the worst on a one-year basis (-4.6%), Olive Garden’s -1.5% result implies the biggest sequential falloff in two-year numbers.  On a positive note, comparable sales growth at both Capital Grill and Bahama Breeze came in better than I was expecting with 2-year average trends getting significantly better since the prior quarter.

 

Looking at monthly trends during the quarter for Red Lobster, Olive Garden and LongHorn, April appeared to be the roughest month on a one-year basis, but two-year trends slowed the most in May for both Red Lobster and Olive Garden (as shown in the charts below).

 

Even with the 2.3% decline in blended same-store sales growth, which fell short of management’s implied -1% guidance, EBIT margin continues to be strong at 10.5% (flat with last year), before the $12.7 million pre-tax reduction in sales related to gift card redemptions and the $2 million pre-tax asset impairment charge.  Margins have benefited from lower YOY food and beverage costs as a percentage of sales for the last six quarters, and with seafood costs potentially moving higher, this line item may prove to be a headwind in FY11.  As of February, the company was only locked in on 23% of its seafood costs through December 2010 or about halfway through fiscal 2011.  Seafood costs represent DRI’s largest ticket food item, accounting for 30% of total food costs.

 

Despite the slowdown in trends, Darden guided to 2% to 3% blended same-store growth in FY11.  Going into the quarter, I said this level of growth could be a stretch because it implies continued improvement in two-year trends.  Seeing that the company’s two-year average same-store sales growth already slowed during the fiscal fourth quarter with trends, for the most part, decelerating more in May , this full-year guidance seems aggressive. 

 

Although Darden’s same-store sales outperformance narrowed during the fourth quarter relative to the Knapp-Track benchmark to 0.5% from nearly 5% in the prior quarter, I continue to believe that Darden is one of the best positioned companies to navigate through this difficult economic period.  To that end, the company proved its financial strength by raising its annual dividend by 28% and buying back nearly $70 million in shares during the fourth quarter.

 

DRI – FIRST LOOK - RL May 2010

 

DRI – FIRST LOOK - OG May 2010

 

DRI – FIRST LOOK - LH May 2010

 

Howard Penney

Managing Director

 


Squirming Bulls

“When you’re finished changing, you’re finished.”

-Benjamin Franklin

 

My citing a Thomas Jefferson quote yesterday certainly stirred the pot. I haven’t had that many responses to an Early Look note since I took the other side of Barton Biggs (on May 27, 2010 after Biggs suggested that the Thunder Bay Bear was going to “squirm”). I appreciate all the feedback.

 

After getting plugged chasing a made for Manic TV CNBC “China” rally on Monday morning, and then seeing the SP500 close down for 3 consecutive days, the bulls are the ones doing the squirming now. The US stock market hasn’t had 3 consecutive up days since April.

 

Jefferson, like most politicians, was a professional storyteller, prone to hypocrisy, and subject to squirming. We know that markets don’t lie; politicians do. What we don’t know is why the Modern Day Roman Empire that is America’s financial system continues to believe that the rest of the world isn’t watching?

 

From a financial forecasting perspective, the Fiat Fools in Washington have proven that they are finished changing. So, in this brave new political era where the President of the United States is telling stories about “holding people accountable”, we’re going to tag along Benjamin Franklin’s aforementioned quote and assume the current US monetary policy experiment is “finished.”

 

Sadly, in what has become a proactively predictable statement of politically conflicted US Federal Reserve policy, in yesterday’s FOMC statement Ben Bernanke opted to pander to the political wind that has amplified both the volatility of markets and the cyclicality of growth since he took his lead from Alan Greenspan.

 

Our advice yesterday (for the US government to become Rigorously Frugal) was born out of the respect we have for both the cost and access to capital. Promising a “risk free” rate of return of ZERO percent to both domestic and foreign investors will not inspire investment. We live in an interconnected world where capital seeks yield. Ask the Brazilians and Chinese what they think about that…

 

Whatever you do, don’t ask Ben Bernanke and his Troubadour of the Willfully Blind at the Federal Reserve for an economic forecast. If he didn’t see economic growth and inflation in the last 12 months he’s definitely not going to see it now. Like a broken clock, he’ll eventually get it right – the double dip we are forecasting for both the US economy and US housing will be here come Q4. By then, Bernanke will be formally cutting his economic forecasts.

 

As a reminder, Bernanke’s forecasts on US economic growth are about as far out in the stratosphere of nod as we have seen in some time. That said, given his outlook, he should have the Fed Funds Rate at least 100 basis points higher than where it stands today (he is looking for upwards of 4% GDP growth in the US in 2011). So it’s time he either raises rates in line with his forecast or just takes a chainsaw to his forecasts.

 

Let’s think about those two options for a second:

 

1. Raising Rates – since he couldn’t raise them when he should have, now he won’t be able to cut them when he needs to. The yield on 2-year US Treasuries is hitting all time lows this morning of 0.64%. If one of the brave economists in Washington wants to tell me a story about how the US Treasury market is forecasting anything other than a double dip, please send me an email.

 

2. Cutting Forecasts – since Bernanke’s forecasts are turning into THE lagging global economic indicator, it is very probable that he cuts his economic forecasts in the coming quarters. By the time he does that, most of the Squirming Bulls are going to be looking back in the rear-view mirror at a US “growth and earnings” story that slowed (most recent sales updates from BBY, TOL, FDX, BBBY, etc are on the tape – they weren’t good).

 

If you are finished learning, you’re definitely finished thinking. How does Heli-Ben think about the interconnectedness of global markets? Where does the most relevant mathematical consideration since relativity (chaos/complexity theory) fit within his forecasting model? Do real-time market moves register on his radar or is he still busy marking-his-estimates-to-the-broken-Greenspan-model?

 

Don’t ask Timmy Geithner for a bone on these answers either – he’ll be the first to tell you that he is “not an economist.” He’s simply a professional politician advising the President of the United States on global economic matters.

 

Since the Chinese signaled that they’ll continue to wear the pants in this Global Creditor/Debtor relationship earlier this week, we have seen the three pillars of US economic growth hopes crumble: Industrials, Financials, and Consumer Discretionary (XLI, XLF, and XLY are the ETFs).

 

After holding their breath barely below this bear market’s water for the last 3 weeks, these 3 critical sectors (XLI, XLF, and XLY) in our S&P Sector Risk Management Model have broken on both an immediate term TRADE and intermediate term TREND perspective. These are called leading indicators, Mr. Bernanke. If you want some help, please send us an email at .

 

Other than collapsing US bond yields and US stock prices, what other global macro leading indicators have us forecasting double dips in both US housing and US economic growth?

  1. Chinese equities are down -21.7% YTD and have closed down the last 2 days
  2. Dr. Copper (a proxy for Chinese demand and US Industrial growth) remains broken from a long term TAIL perspective
  3. European equities continue to sell off this morning after rallying to lower-long-term highs in the last 2 weeks

Now if you don’t believe in the interconnectivity of global markets, complexity theory, or that the US growth engine isn’t tied to both, you won’t believe any of my storytelling this morning. If you’re finished reading, you’re not finished figuring this out yet.

 

My immediate term support and resistance levels for the SP500 are now 1081 and 1105 respectively. I sold 1/2 of our position in TIPs in the Hedgeye Asset Allocation Model yesterday, taking our allocation to Bonds back down to 6% from 9%, because a negative growth outlook is deflationary, in theory. Our allocation to cash bumped back up to 64% from 61% day-over-day.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Squirming Bulls - Pic of the Day


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