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MGM: Dubai bailout? Not today...

Suffice to say, the day trading community has had some fun whipping around in MGM the last few days. Up +20% on Friday, then down -9% today. Its a good thing my partner, Todd Jordan, has the edge here. Today's breakdown was a material one. This stock is a short to $26.20.
  • MGM closing below $30.99 is very bearish.
    KM
(chart courtesy of stockcharts.com)

MCD – Mapping the Response

Earlier this morning, I posted the results to the question I posed to MCD franchisees regarding their current level of contentment (relative to past periods) as it relates to how they feel Oak Brook is handling the issues facing franchisees today (please refer to my ‘The Question’ posting for more details). To recount, “1” is 100% contentment and “10” is wanting out as fast as you can.

When you match up that franchisee sentiment with MCD’s stock price, it becomes apparent that increased levels of franchisee anxiety does not bode well for the overall MCD system and its stock price. For reference, the late 1990’s to 2002 was one of the worst periods for McDonald’s franchisees and not surprisingly, MCD’s stock. This number has now crept up to 5.2 (above the 3.7 average)…Stay tuned!
MCD’s Stock Price Relative to Franchisee Sentiment

Marking US Homes To Market

This morning's existing home sales release for the month of July was better than toxic. Toxic was the June report of 4.85M homes. July came in a touch better at 5.0M.

Prices are finally coming down (down -7% year over year), and this is starting to stimulate some tepid demand. I still think prices have to come in another -14% in order to alleviate this untenable inventory position of unsold homes. On the inventory front, month’s supply is still extremely elevated at 11.2 months.

If you are long a US home and looking to sell it, marking it to market rather than to model is my advice.
KM

(picture: http://www.willowmanorapts.com/ForSale2.jpg)

Early Look

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Requiem for the levered longs: swap rate spread to treasury vs. the S&P 500

This is a very interesting chart when you consider it in the context of cost of capital for the levered long "Activists" out there in the US market place; particularly those who rely heavily on “buying stock on swap”.

As the leverage cycle rolls over alongside the economic cycle, access to capital will continue to tighten. This will lead to some mega blowups in the land of levered long hedge funds.

Keep your eyes on this developing "Trend”.
KM

Stagflation in the world's 5th largest economy, The United Kingdom...

Scotsman, Ian Macleod, a professional card player and war hero turned conservative politician, is credited with coining the term stagflation.

In 1965 while speaking before the House of Commons Macleod famously observed “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of “stagflation” situation.”

Macleod died in 1970, but he would certainly recognize the implications of the chart attached below. With the GDP numbers released on Friday for the second quarter the UK economy is clearly entering the worst of both worlds.

Andrew Barber
Keith McCullough
Research Edge LLC

‘The Question’

The purpose of “The Question” is to get to the bottom of key issues of investment significance, and to call out those companies that are particular standouts (+ and -).

My approach to the question this week was specifically geared to McDonald’s. I believe that the McDonald’s system faces many challenges, the extent of which is not being felt in Oak Brook. Having been a McDonald’s observer for the better part of 15 years now, I wanted to put franchisee anxiety into historical context. With that in mind, we set out to survey the McDonald’s franchise system to see how the general population is feeling.

If "1" is 100% contentment and "10" is wanting out as fast as you can, what is your level of anxiety with how Oak Brook is handling the issues franchisees are facing today? For historical context, to the extent they could, they were asked to rate past periods too.

(1) Overall in the history of MCD – 3.7

(2) In the 1980s – 4.3

(3) In the late 1990s to 2002 – 6.9

(4) Today – 5.2

The late 1990’s to 2002 was one of the worst periods for McDonald’s franchisees. While we are not seeing those levels of discontent today, the trend is not working in management’s favor.
Herb Peterson, McDonald’s franchisee and the creator of the Egg McMuffin, showing off his invention in April 1997 in California.

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