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RISK, Part II: Charting Complacency

We have charted an inverse VIX with the S&P 500. Identifying complacency is a timing exercise. The recent correlation here is what it is.

Keith McCullough
CIO

Andrew Barber
Director

CKR – Building Momentum

CKR posted solid period 7 same-store sales growth at both Carl’s Jr. and Hardee’s, up 4.2% and 1.4%, respectively, closing out 2Q up 3.8% at Carl’s Jr. and up 3.3% at Hardee’s. Both concepts experienced sequentially better 2-year average trends in 2Q from 1Q (100 bp improvement at Carl’s Jr. and 250 bps better Hardee’s). CKR will break out the contribution from price and traffic when it reports its 2Q09 results, and as I mentioned in my post on July 22 (The Pricing Balancing Act Continues), the company has been raising its prices a little more aggressively (up 4% in 1Q09). We will have to wait to see how this has impacted CKR’s traffic trends.
  • CKR also provided restaurant operating cost guidance for 2Q and expects restaurant operating margins to be up 20-50 bps year-over-year. The company is facing an easy comparison from last year when restaurant margins fell 300 bps (primarily as a result of higher food costs), but margins growing YOY is favorable, nonetheless, as CKR’s margins have declined for the last 6 quarters. For reference, the company is also facing as easy comparison in 3Q as margins were down 190 bps in 3Q08 on a consolidated basis (down 260 bps at Hardee’s).
  • These favorable year-over-year restaurant margins should translate into expanding operating margins as the company has communicated that it is focused on reducing its G&A expenses, which have been criticized as being too high (Ramius LLC, me). CKR’s operating margins grew YOY in 1Q for the first time in 5 quarters (up 40 bps), and management stated on its last earnings call that the lower levels of G&A in 1Q would be an appropriate run-rate going forward. The company highlighted that it will see about a $1 million increase in its share-based compensation (included in G&A) in 2Q, but that the level of increase will be only slightly more than what the company experienced in 1Q.

Risk: Spread Charts - short and long term

With 2 Year Treasury Yields tanking in the past few weeks, and 10 Year Yields remaining stickier, we have ourselves a widening spread.

Looking at the short term chart, risk premiums clearly changed in 2008. Looking at the 30 year chart should give you a keen appreciation for where this relationship has been and, more importantly, where it could go from here.

The lowest level that the spread has achieved in 30 years at the close was -241bp on march 30, 1980. The highest was 275bp on July 29, 2003.

Keith McCullough & Andrew Barber
Research Edge LLC

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Earnings Season vs. Volatility (VIX)

Same "Trend", different overlay. It's "Macro Time".
KM

WYNN MACAU: VIP CONVERSIONS AS MARKET SHARE ERODES

Wynn Macau, the Teflon Don of Macau, posted a huge second quarter in Macau, generating explosive growth in both the VIP and Mass Market business. The property appeared untouchable from the escalating competitive environment and government efforts to slow growth. Indeed, as Steve Wynn pointed out in the conference call: “Five of the six (operators) chased each other in a circle raising junket fees and blew their margins and then complained about it. We did not. We experienced our greatest revenue periods in the history of the company at a lower rate of junket commissions than the other five.”

My guys in Macau are indicating that the teflon surrounding the casino may be getting a bit sticky. I think pressure is finally on Wynn Macau to raise commissions. The property appears to be losing VIP market due to very high junket commission rates offered by Galaxy, Grand Lisboa, and MGM. The mass market side of the business is not offering any relief. Foot traffic is noticeably and consistently lower the last few weeks, probably resulting from the fully ramped ferry service offered by Venetian Macau. Remember that Venetian Macau resides on the Cotai Strip which is surely pulling visitation away from the peninsula and Wynn Macau. In fact, Wynn Macau recently converted at least 20 high margin mass market tables to lower margin VIP tables. This could certainly be indicative of slower mass market visitation.

Wynn Macau is clearly best run and most successful casino in Macau. That won’t change. However, expectations for the property and for the stock remain very high. The fall from the top is much farther as John Gotti found out.


Wynn Macau has been untouchable from the competition, until now

Crisis Of Confidence Remains Paramount

Last night's ABC/Washington Post consumer confidence reading hammered home a simple reality. Main Street is not buying into this fade Oil, buy stocks "Trade".

The weekly reading has been dead in the water at -49 to -50 for the last 3 weeks. This has occurred in the face of falling prices at the pump and rising stock prices. Hmmm...

It is global this time, indeed. But don't forget that Wall Street is in the midst of creating irreparable damage to Main Street's confidence.

KM

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