Same Store Sales

Confirming that while Central Banks may have halted economic logic and reason indefinitely, supply and demand still have some relevance in the real world was today's earlier news that in the aftermath of McDonalds' 20% price hike of basic burgers in Japan three weeks ago, that the company's Japanese same store sales tumbled by a whopping 3.7% in April, a major contributor for the miss in the expected global same store sales for April which came at -0.6%, below Wall Street expectations. One can only guess what the SSS drop would have been had MCD implemented the price hike at the start of the month. One can also guess if the increase in average price offset the drop in sales volume - we will know soon, but just to make doubly sure if what MCD loses in volume it makes up for in price, McDonalds announced that one month after the 20% price hike in Japan, its Indian franchise operator said it too would proceed with a price hike - the second one this year - amounting to 5-6%.

With China offline celebrating its New Year, and potentially mobilizing forces in (not so) secret, and not much on the global event docket, the upcoming G20 Finance Ministers meeting in Moscow at the end of the week will be the key event for FX markets, which these days define every other aspect of risk. It should surprise nobody the last couple of weeks have seen increased attention on exchange rates and the frequent use of the “currency war” label by policymakers in many countries. No news announcements are expected at the BoJ meeting on Thursday, following the formal announcement of a 2% inflation target and an open-ended asset purchase program. On the data side, US retail sales on Wednesday will provide an important signal about the strength of the US consumer following the largest tax increase in decades. Although January auto and same store sales data was reasonably solid, new taxes will soon begin to weigh on spending. Also on Wednesday, Japan Q4 GDP will be released. On Thursday, Q4 GDP for France, Germany, Italy and the Euro area will be released. While Q4 contraction is assured, the key question mark is whether German can rebound in Q1 and avoid a full blown recession as opposed to a "brief, technical" one, as the New Normal economic term goes.

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. 

Earlier today, fast food juggernaut McDonalds reported same store sales for the month October. At -1.8%, this number was well below expectations of -1.1%, and a drop from September's 1.9%. It was driven by a 2%+ drop in comp store sales across all locations: US, Europea and APMEA, with the US performing just as bad as Europe. Most importantly, this was the first monthly drop in MCD comp sales since March 2003! So our question is: at what point does the perpetually self-deluded US population finally admit to itself that when even 99 cent meals are no longer affordable, that this country has a problem?

From Whitney Tilson's just released letter: "It was an ugly month – our second-worst ever – but for perspective, our fund gave back slightly more than the 12.3% gain of the previous two months. We’re still having a decent year, with a healthy, market-beating gain. In fact, this is the fourth-best start to a year in our fund’s 14-year history." Is that so? May one inquire, in the aftermath of the JPM CIO scandal, does T2 mark the bulk of their positions, which as Zero Hedge disclosed recently are call options, based on market, or based on magical bid/asks, to be made up on the go (as in JPM'scase)? That's right - a hedge fund which "invests" in theta. Is there any wonder why the "hedge fund" with about $200 million in actual stock-based AUM (the balance being calls and warrants), may be the first one with a negative Sharpe ratio? For a visual summary of why LPs (aside from friends and family of course) in T2 are singlehandedly propping up the bottom line of Dramamine, see the chart below.

The most profitable business of the future will be producing Space Available and For Lease signs. Betting on the intelligence of the American consumer has been a losing bet for decades. They will continue to swipe that credit card at the local 7-11 to buy those Funions, jalapeno cheese stuffed pretzels with a side of cheese dipping sauce, cartons of smokes, and 32 ounce Big Gulps of Mountain Dew until the message on the credit card machine comes back DENIED.  There will be crescendo of consequences as these stores are closed down. The rotting hulks of thousands of Sears and Kmarts will slowly decay; blighting the suburban landscape and beckoning criminals and the homeless. Retailers will be forced to lay-off hundreds of thousands of workers. Property taxes paid to local governments will dry up, resulting in worsening budget deficits. Sales taxes paid to state governments will plummet, forcing more government cutbacks and higher taxes. Mall owners and real estate developers will see their rental income dissipate. They will then proceed to default on their loans. Bankers will be stuck with billions in loan losses, at least until they are able to shift them to the American taxpayer – again.

Ahead of the North American open, European Indices are trading in negative territory following further deliberations over a Greek settlement, with a tentative meeting between the Greek PM and his respective Party Leaders scheduled for some time after 1600GMT as well as an underperforming Basic Materials sector following caution over the upcoming Glencore/Xstrata merger. In foreign exchange news, the EUR/CHF currency pair has exhibited volatility following comments from the SNB’s acting Chair Jordan. Jordan has committed the Central Banks’ resources to preventing any further appreciation of the CHF adding that the SNB will buy unlimited amounts of Forex to defend the minimum level of 1.2000. Overnight, the AUD index has appreciated following an unexpected move by the RBA to hold its base rate at 4.25%, with many analysts expecting a drop in rates due to the global economic outlook and domestic job losses. In terms of European economic releases, German Industrial Production data fell below expectations for the month of December, posting a 2.9% fall while the figure was expected to stay flat at 0.0%.

Following today's increasingly more adverse news for Sears, which saw primary vendor funder CIT cut ties with the Eddie Lampert mega investment, it was only a matter of time before the market realized that the jig for the once bankrupt retailer may be up, and a Chapter 22 is the only possible option. Sure enough, the first to respond to this is the rating agency that not only is capable of forward looking activity, unlike all the other NRSROs, and also managed to get Jefferies to admit it had a far greater European exposure than the market was comfortable with (resulting in a major cut in gross and net, and a far greater transparency into its balance sheet). As of minutes ago, Egan Jones just downgraded Sears Holdings to the lowest rating just above default: C, from CC.

Japan Launches Campaign to Weaken Yen (WSJ)
ECB to protect Europe by buying bonds (Telegraph)
Silent Scream of Swiss Franc Shows Great Distortion Amid Great Moderation (Bloomberg)
Pressured by White House, Treasury Secretary Is Expected to Stay at Post (NYT)
The U.S. Economy Feels the Pull of Gravity (BusinessWeek)
ECB Sees Lenders Rush to HoardCash (FT)
Groupon’s Strikeouts Reveal an Unspoken Truth (BusinessWeek)
Americans' Spending Increases in July (Gallup)
Pentagon’s First Installment on Cutting Debt May Be $28 Billion (Bloomberg)

• Tepco Says Fuel in 2 Reactors May Have Melted (Bloomberg) "The findings at the No. 1 reactor indicate the likelihood
  that the water level readings in the other reactors aren’t
  accurate"
• The Destruction of Economic Facts (BusinessWeek)
• US residents flee sacrificed Mississippi flood towns (BBC)
• 'Dominique Strauss-Kahn Is Finished' (Spiegel)
• IMF in Wake of Scandal Turns to Lipsky (Bloomberg)
• The Known Unknown of Greek Debt (WSJ)
• Greece Aid May Be Clouded by Strauss-Kahn Arrest (Bloomberg)
• Lowe’s Profit Trails Estimates as Home Projects Curbed (Bloomberg), and, you guessed it, bad wearther blamed
• Warning signs on market liquidity risks (Reuters)... pretty much as warned on Zero Hedge in April 2009

• Australia's central bank keeps benchmark interest rate steady, as expected.
• China Treasury Holdings rise to $1.16 trillion in December, US data show.
• China’s PMI fell to 52.2 from 52.9 in Jan - slowest pace in six months.
• European economy recovers; joblessness below 10% but inflation still above target.
• Oil trades near one-week low after Saudi Arabia offers to cover supplies.
• US approves first deepwater drilling in Gulf since BP oil spill.

Tim-fucking-berrrrrrrrrrrrrrrrrrrrrrrrrrr. Holy shit is it on like...

The market rose for the 7th straight day (and the day was so straight that...

Who would have thought that such things as consumer wealth and cash actually matter for companies? After CSTR enjoyed a doubling of its stock price in the past year, it now appears many of these were based on the same thing that has driven the entire economy: hopium. The company has slashed Q4 revenue guidance from $415-440 to $391, and now sees EPS of $0.65 and $0.69 compared with guidance in the range of $0.79 to $0.85. Coming to pretty much every single consumer discretionary (ahem Netflix) stock near you.

It was a fairly quiet day on the market as investors get ready for earnings season, brace for...