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Although we were disappointed by same-store sales trends during the first quarter, we are confident COSI will put up sequentially better numbers during 2Q10 as the company began the quarter with positive momentum and is lapping a sequentially easier same-store sales comparison.  During the first quarter, trends were adversely impacted by severe weather with February company-owned same-store sales -9.4% and traffic down more than 10%. 


Same-store sales turned positive in March and were up 2% for the system, however, and management stated that trends remained positive in April and through the early weeks of May.  I expect June to show a similar trend.    



Despite the weaker than expected comparable sales result in 1Q10, average check turned positive after being negative for all of full-year 2009.  Helping average check growth was the 2% increase in catering sales during the quarter.  This positive catering sales growth followed a 27.5% decline in both 2Q and 3Q09 and a 13.5% decline in 4Q09.




PRODUCT INITIATIVES: In late March, the company rolled out three breakfast wraps in an attempt to drive revenue growth during the breakfast daypart and in April, COSI launched its spring LTOs.               


CATERING: Not only is COSI facing an easy YOY comparison in 2Q10, but the company also recently stepped up its direct sales initiatives, expanding efforts in its Chicago market late in the first quarter, and more recently, in its Philadelphia market.


MARKETING: COSI will see the benefit of additional and refocused marketing dollars during the second quarter after shifting its marketing dollars away from the extreme winter months of 1Q.  Specifically, the company is increasing its out-of-store media activities in an effort to reach new guests and drive traffic.  Along with its spring LTO and breakfast wrap rollout, COSI launched a transit advertising initiative in its major urban markets.   According to management, the initial feedback was favorable.


COSI is working to extend its social media outreach, and tested the social media channels with a free smoothie and drink promotion on April 29th.  Management commented that sales in the promoted categories experienced significant transaction growth in the days following the promotion.


Relative to margins, comparisons are more difficult in the second quarter but it will be important to see how much leverage the company achieves in 2Q10 with what should be significantly better top-line trends. 



Banks Will Adapt and Avoid Losses, Analysts Say

The Long Decline of Savings

Conclusion: The decline in national savings is a structural impediment that will cause an increased reliance on foreigners to fund U.S. deficits.


The long decline of the savings rate in the United States has been a widely discussed topic.  In fact, we highlighted this in the Early Look yesterday morning with a chart showing savings as a percentage of GDP, which in the 1970s and 1980s was in the 5 – 7% range and has since declined to the 1 – 3% range.


Many pundits suggest the decline in savings is a non-issue, while others, more on the extreme, believe that it one of the primary economic issues currently facing the United States.  While the implications can be debated, the fact remains that the savings rate has declined dramatically over the past few decades and is among the lowest of any modern nation state.


As a refresher, the basic formula used to calculate savings rate is as follows: 

  • (Income – Federal Taxes – Expenditures = Savings) / Disposable Personal Income

The Bureau of Economic Analysis keeps this statistic via its NIPA (National Income and Product Accounts) savings rate, which is computed by that savings output as outlined above divided by disposable personal income.  The expenditures include interest payments, but exclude mortgage payments.


Critics of this calculation suggest there are a couple of major factors that are excluded from the above calculation that should, arguably, be included, which are: homes and capital gains on stock sales.  That is, as we purchase a home and pay down our mortgage, and the home appreciates in value, it is a form of savings.  As it relates to stock sales, when we realize capital gains this inherently increases our net worth and, ostensibly, our savings; although arguably this is just a return on prior savings.


The reality, though, is that savings rate is still a decent proxy for the American consumer’s savings rate and, more importantly, the direction of those savings, especially as it has been calculated with some consistency by the Department of Commerce over time.


In the first chart below we show the savings rate versus the Fed Funds Rate – which we use as a proxy for the interest earned in savings accounts.  Long term, and not surprisingly, as the interest rate has decreased, so, too, has the rate that American consumers have saved at as they have attempted to find higher returns for their hard earned capital.   In the short term, the savings rate has increased slightly, but based on the long term trend of interest rates down and savings rate down, it seems that a more sustained increase in savings is unlikely until consumers are incentivized to save via higher interest rates.


In the second and quite honestly more alarming chart, we’ve outlined the broad savings rates within the U.S. economy.  This is a combination of consumer based savings, government savings via surpluses (or lack thereof), and corporate savings.  In early 2009, savings in aggregate as a percentage of GDP went negative for the first time since 1952, and has continued its downward trend.


One potential economic risk to the low savings rate is that U.S. consumers retrench and opt to change their consumption patterns and instead of spending, they aggressively begin to save.  This would be the reversion to the mean theory of savings and is somewhat fanciful absent an increase in interest rates.


There are also some serious headwinds facing the United States in increasing its savings rates related to demographics.   Specifically, old people save less than young people.  Therefore as a population ages the savings rates will naturally decline, and create a headwind to increasing that rate.  In the United States, this is the trend.  According to a 2006 report on demographics from Congress, by 2025 18% of the population will be over 65 years old, versus 12% in 2000.


More broadly, the primary risk of a lack of savings in the United States, be it personal, corporate, or governmental, is an inability to fund, via domestic means, the large deficits being run by the federal government – currently at north of 10% of GDP.


While the issue of dependence on foreign oil is accurately raised as a real economic and strategic risk to the United States, what about the risk related to a dependence on foreign debt financing? The combination of a low domestic savings rates and lack of government savings (i.e. a massive deficit) means that the United States will continue to rely on foreign financing to bridge deficits well into the future. Considering, any external shift on the margin in perception of the U.S.’s credit quality is likely to have a substantial impact on Treasury yields.


Daryl G. Jones

Managing Director


The Long Decline of Savings - US Savings Rates


The Long Decline of Savings - US Net National Savings

Early Look

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Hedgeye Break-In: Greek CDS At All Time Highs . . . Ignore At Your Peril

If you are wondering why European stock markets are down today, look no further than the chart below.  Greek credit default swaps are at their highest level ever.  And ever, as they say, is a long time.


As always, credit markets are leading indicators for equity markets.  The implication of this level in credit default swaps is that Greek debt is probably not worth the value that the European Central Bank is currently buying it at, which is at par.  The broader issue related to a Greek debt restructuring is the balance sheets of European banks that hold its debt.  As we noted on our Sovereign Debt Call in March . . .European debt is interconnected.  In fact, France, Germany, and Britain own the vast majority of Greek debt.


Aside from watching European CDS, we have also been very focused on European liquidity with a primary concern relating to the piling up of cash in the ECB deposit facility, a sign that banks are not lending.  As it relates to specific liquidity catalysts, July 1st should be a day of focus in Europe as that is the date the European Central Bank’s 12-month Long Term Refinancing Operation winds down.  Over the course of that 12-months, more than 440 billion euros of liquidity was added to credit markets.  Shortly, this will be in the rearview mirror, and with it the lows in the cost of capital in Europe.


Credit and liquidity issues in Europe are just beginning.


Daryl G. Jones

Managing Director


Hedgeye Break-In: Greek CDS At All Time Highs . . . Ignore At Your Peril - PIIIGS CDS

Bear Market: SP00 Risk Management Levels, Refreshed

From an intermediate term TREND perspective, this remains a bear market (1144 = TREND resistance in the chart below).


That said, all bull and bear markets get overbought/oversold on an immediate term TRADE basis. Its our risk management task to plant and prune our positions with overbought/oversold levels in mind.


We just covered our short position in the Dow (DIA) because we see any price in the SP500 at or below the immediate term TRADE line of 1077 as a good spot to cover some shorts. In other words, 1077 is the immediate term oversold line.


There is nothing about US economic growth expectations that we consider appropriately built into the powers that be of American consensus yet. That said, consensus meets reality over time where it matters – on the tape.


Give this bear market time. It finally has the bulls squirming.



Keith R. McCullough
Chief Executive Officer


Bear Market: SP00 Risk Management Levels, Refreshed - S P


Street account just reported that WEN is “is trading higher in reaction to a rumor circulating that Nelson Peltz, with the board, is considering a cash bid of $8/share for WEN.” 


On May 19, we published our sum of the parts analysis on WEN and came up with an estimated value per share of $7.81.  Please refer to the table below to see how we got there.  For reference, this sum of the parts analysis assumes continued margin expansion at Wendy’s in FY10 (though not to the same magnitude as we saw in 2009) and continued margin erosion at Arby’s. 


WEN – RUMOR MILL - wen sotp



Howard Penney

Managing Director