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LVS is down 29% in the past week including 6 straight daily declines. I’m no fan of the Macau stocks but the Bank of America downgrade may provide a near-term short covering opportunity. The stock appears oversold if it goes below $39 per Keith McCullough’s quantitative model. Moreover, we may get a fundamental positive catalyst as soon as next week. My Macau guys think LVS is close to finalizing a credit facility to finance some of its Macau development. An agreement here could provide a little support for the stock considering investor concerns around financing.

I still think the trend is lower on the Macau stocks.

Lehman (LEH): Is Korea The Answer To The Transparency Problem?

So now Singapore is going to own Merrill Lynch and Korea is going to own Lehman Brothers. Hmmm... Sounds like we are definitely on the right track to solve the transparency problem in the US Financial system, doesn’t it!

If you think that selling our said trophy Wall Street investment banks to governments who don't disclose anything is a good thing, run out and buy yourself some US Financials today.

This looks like a game of ‘Monopoly’ where we are parceling off Wall Street due to foreclosure.

Thanks Ben

Bernanke's boilerplate statement on the US Economy this morning out of Jackson Hole doesn't have any proactive or predictable value for the US market. The slight change in his wording was that he expects "medium term” inflation to abate somewhat, but guess what, he has been predicting a slowdown in inflation since 2006!

Obviously Ben's “call” on inflation has been one of the worst macro calls in recent memory. That said, eventually even a broken clock gets the time right. Surely using his new "medium term” definition gives him room to call inflation abating before the year 2010, but who cares.

Bernanke's crystal ball has had zero predictive value. I am not sure why the media and traders think it does today, other than they have no context.

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Taiwan joins Singapore, Japan, etc in the Asian Slowdown camp

Asian growth slowed materially in Q2 of 2008. That will be a historical perspective that most investors look back on when this year is all said and done. Unfortunately, a large % of them didn't see it coming ahead of time.

The Harvard Endowment, for one, went on an ETF buying binge, and loaded up on Taiwan too early (the ETF for Taiwan is EWT). This morning the Taiwan government reported Q2 GDP slowing to +4.3%. That's down sharply versus prior expectations and down from +6.3% since Q1 of 2008. It is global this time, indeed.
  • The TAIEX Index has dropped -26% since May 19th, 2008 to 6,911.
chart courtesy of stockcharts.com

FL/HIBB: Knockout Combo

I still like FL here, and am increasingly concerned about SKX and others levered to non-performance, as reiterated yesterday.

While HIBB posted solid comps (+5%), FL was nothing to write home about – about in line at -0.5%. But with sales up 1.5% in total, we saw inventory down 3.5%. The key was that gross margins came in +419bps vs. last year. As a frame of reference, my quarterly model goes back to the late 1990s, and I cannot find a single quarter that comes close to +419bps in order of magnitude. What I like is that the strength I’m seeing now is entirely from managing the balance sheet, and any business strength (which I think will come) will be leg 2 of this call.

I hate to sound like a broken record, but I see no reason why FL cannot, and will not, revert to a mid-single digit EBIT margin over 2-3 years.
So rare for FL to look so good on this sales/inventory/GM chart (let me know if you need help interpreting).

BKC – The Commodity Cost Outlook Disconnect

BKC’s 4Q08 5.5% same-store sales growth at its U.S. and Canada division looked impressive at first glance, particularly when you consider the strong 4.8% comparison from last year. But, this solid top-line growth did not translate into restaurant margin growth. Instead, BKC reported a 360 bp decline in company restaurant margins in the U.S. and Canada. Management attributed 200 bps of the decline to higher food, product and paper costs and 130 bps to non-cash expenses related to restaurant reimages (net of the reimaging program, margins would have declined 230 bps).
  • On its earnings call, management commented on its commodity cost outlook, saying “In the fourth quarter, beef cost increased 11% and chicken costs remained unchanged largely due to our multi-year fixed price contract compared to the same period last year. We believe commodity cost peaked last month and it appears over the next six months the general economy is likely to support a decline in food cost…Consequently, over the next six months we expect our commodity costs to decline 2 to 3% from where they are today. But still up 5 to 7% over the prior year. This is our best forecast given the ongoing volatility in the commodity market and what we know today. “
  • This was the first time I have heard any restaurant management team say that they think commodity costs have peaked. For the most part, most companies have said they continue to see prices moving higher so BKC runs the risk of having set expectations that commodity costs have peaked. BKC’s FY09 guidance includes the expectation that company restaurant margins in the U.S. and Canada will be unchanged from FY08’s adjusted level, and management anticipates offsetting its 5%-7% food inflation with strong comp performance and pricing initiatives. BKC will need its favorable commodity cost outlook to hold true for that to happen, particularly with a chicken contract that is set to expire in December.
  • Below are recent comments made by a handful of management teams that I think would disagree with BKC’s favorable commodity cost outlook:
  • June 26 – CKR CFO Theodore Abajian: “Really, I think everybody is starting to see beef prices go up again, with feed prices having gone up. And you know, that’s something that everybody is going to have to deal with. We are going to certainly look at taking additional price increases as needed to offset incremental costs.”
  • July 17 – YUM CFO Richard Carucci: “To your point, John, we don’t know what’s going to happen to commodities but we are planning as if they are going to stay high and what we’re going to try to do is just make sure we don’t get behind on it. You know, quite frankly, this year we went into the year assuming it was going to be $55 million. It ended up being $100 million in the U.S. and we got a little bit behind on pricing.”
  • July 23 – MCD CFO Peter Bensen: “Obviously you hit it that the beef costs will be higher the second half of the year than we experienced in the first half, and again we have a lot of confidence that our supply chain folks will help to mitigate the impact as best they can, but the reality that we are all dealing with is that we expect them to be higher in the second half of the year.” McDonald’s raised its beef cost outlook for FY08 to up 8%-9% (from its prior guidance of relative flat). Management also stated that its dollar menu would look different next year than it currently does due to current cost implications.
  • July 29 – BWLD said they would want to lock in chicken wings at the current prices but that suppliers are not interested (implies that they think prices will be going up).
  • July 28 and 29 - Two chicken processors reported and for the first 9 months of fiscal 2008, Tyson’s chicken segment and Pilgrim’s Pride have collectively lost $263 million. This trend can’t continue. Pilgrim’s Pride’s average breast meat price in 3Q was $1.47 per pound and management stated that based on its current expectations, breast meat prices need to reach $2.15 per pound just for the company to breakeven. That means prices need to increase over 60% just for PPC to cover its costs. Chicken prices are inevitably going higher for restaurant industry.