Russian Bear Hunter

Saber rattling is keeping Russians distracted from the battered Ruble and RTSI –so far.

It was a brutal day for the Russian market today. The RTS index declined over 4% again in its second huge down day in a row after the government released a lower than expected Q2 GDP growth figure of 7.5% -down from 8.5% in Q1.

So far, the conflict in Georgia and US plans to put missiles in Poland are keeping the public from focusing solely on the economy. If the markets continue to crash, Putin will need to shoot more than just Tigers to keep his people distracted.

Andrew Barber

CKR – Is someone hovering?

CKR filed an 8-K yesterday highlighting its recently approved amendments to its company Bylaws. The changes expand the rules around director nominations and providing proper notice to CKR to conduct business at a stockholder meeting. Specifically, the amendments clarify that a stockholder providing notice relative to such nominations or stockholder meeting business must be a stockholder of record both at the time the notice is given and at the time of the stockholder meeting at which the business referenced in the notice will be considered. In short, “the amendments expand the disclosures required to be provided by a stockholder pursuant to such notice.” Such disclosures would include any relationships between a shareholder and any nominee for election as a director.

I find the timing of these changes to be quite telling as the company recently (June 17th) received a letter from Ramius LLC that publicly criticized CKR’s overly aggressive operating cost and capital spending levels and outlined steps to bring about immediate change, such as consolidating its three company headquarters. It was obvious that Ramius’ comments spurred some questions and concerns by others as CEO Andrew Puzder dedicated a big portion of his presentation at CKR’s annual meeting (which took place two days after the letter was received) to addressing the issues communicated in Ramius’ letter. The fact that the company is now tightening its rules around director nominations and conducting business at its shareholder meetings signals to me that the company is facing increased shareholder pressure.


Las Vegas operators have tried to focus investor attention on occupancy levels as an indication of still strong demand. Of course, room rates (and margins) are being cut to maintain that demand. But at least the sustained occupancy should sustain gaming revenues, right? Wrong. Strip gaming revenues fell 15%. I had predicted a 12% drop in my 8/24 post “LAS VEGAS: OMINOUS JULY AIRPORT DATA”. Casinos did play unlucky in Baccarat and some other table games but even after normalizing the hold percentage for this July, Strip gaming revenues still fell 9-10%.

Anecdotally, we are not hearing about any positive inflection points yet in August and September. If anything, room rates are falling at a faster rate, indicative of lower demand, not sustained demand. Margins won’t look pretty. I’m still struggling to reconcile the data and short booking windows with MGM’s prediction of a Q4 turn. I’m certainly not seeing it.

Trends are worsening

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Credit Where It’s Due

Keith won’t be thrilled when he sees this set-up, but McGough is breaking rank here! KM has some high-level meetings in NYC today, and I want to give you a glimpse as to why.

While we are in our morning meeting talking about the EU growth outlook, Russia’s continued slide (down another -4.4%), China’s CPI numbers, the stark reversal in yesterday’s US equity markets, and how this all ties into the best stock calls, my Partner Keith McCullough is in NYC this morning partaking in some important high-level meetings with people that have been tracking, listening, and watching our progress. To others following our work, this is likely not a shocker. To everyone else, the performance chart below might paint the picture. It outlines the key market calls Keith has made since May, when we opened the doors at Research Edge here outside Yale University. No, I’m not making up these numbers and dates.

In no way do I want to diminish this recent success, but I want to highlight something that I view as more important than the numbers -- the people and investment processes that drive our model.

I’ve known Keith for a while, and have always known that his results and accomplishments over the past 10 years are tough to argue with. But even way back when Keith, Michael Blum (our COO) and I white-boarded the plans for this business, I did not have any clue as to the sheer depth of his investment process, breadth of intellectual leadership, and ability to balance risk and maximize alpha.

Yes, the day will come when he, and we, will be wrong. And trust me, even though there are plenty of people waiting for that to happen, we will be our own harshest critics – by far.

The investment team here at Research Team is – by the longest of long shots – the best I have ever had the pleasure of working with in my 15 years on Wall Street. I’d pit this research team against anyone, anywhere anyhow. It’s a pleasure to lead them. And yes, as a team, we’re adopting the same process that has driven Keith’s results thus far.

For those of you that have not yet seen it, check out the results of the “Hedgeye Portfolio,” and you’ll see similar results at the individual stock level. The beauty of this model is that thought leadership is very very scalable.

Brian McGough
President and Director of Research
Research Edge, LLC

Hedgeye’s Early Look: “The Entitlement is Gone”

Howard Penney shares his perspective as to why a prestigious business card means little these days, and how it’s all about owning the intellectual debate.
Wall Street is a small place. Living and working in the New York metropolitan area I’m constantly running into people that have worked at various bulge bracket Wall Street firms over the years. After talking with them, the reaction is always the same “I’m so glad I don’t work there anymore,” or “I can’t believe what has happened to XYZ Company.” To digress… the thought of some sovereign fund running one of these companies might be good news in the short run, but disastrous long term. I’m probably not going out on a limb in saying that most Wall Street executives don’t want to work for the government of ….. Nor does a U.S. issuer want to be advised by the government of ….!

Yesterday evening, I had such an encounter with an ex-Lehman salesman. We spent 90 minutes on the sidelines of our daughters’ high school soccer game talking shop, but more importantly watching the girls crush Mountain Lakes 6-0 and yes, my daughter Caroline scored the winning goal – the first one. We both concluded that being ex-bulge bracket employees has its rewards – it has freed us up to sell our stock, which in the case of some fine people I know, is worthless now.

When I first started at Morgan Stanly in the late 1980’s, it was a big benefit to have the Morgan name on my business card. The doors that would open just because I worked at “Morgan Stanley” were amazing. I always joked that a janitor could say he worked at Morgan and people would be impressed. I have not worked there for the past eight years, but I don’t get the feeling that the same entitlement is there today. Of course, the company du jour is Lehman. Previously it was Bear Stearns. In a perverse way, I could argue that some Bear employees were lucky; their Firm was the first to fail. The employees of the second to fail will not be so lucky. Where are they going to go? Goldman/Morgan/Merrill? Not likely! B of A/Wachovia? Maybe some of them… Where are the empty seats?

This is all leading to an investable theme – Wall Street unemployment. Not a new theme, but one that is not going away nor has it completely played itself out (Brian has been talking about the impact here on key players in retail). Profiting from other people’s agony is not pleasant, but we are in the business of generating ideas for our clients. Yesterday in our morning meeting we talked about companies like Tiffany, and others exposed to major Wall Street and international tourism markets (which should take a hit as the dollar strengthens). From where I sit, the whole world can do nothing but afford to eat at McDonald’s – Those same-store sales numbers are so good it can’t be true!

Everything we do at Research Edge is about making clients money – everything! In this environment, without that we don’t have a jobs. No one can rely on the implied entitlement awarded by a Morgan/Goldman/Merrill business card. We need to be right!

We are all experienced, successful analyst/PMs that are coming together to form a business model, that will hopefully improve our collective investment process. Nobody in this world is ever done learning, and if we can make you think – about a company, industry, or macro theme -- then we have both won. More importantly, we don’t have a sense of entitlement, we take nothing for granted.

Function in disaster and finish in style!

Howard Penney
Managing Director

The Slaughterhouse Four

If you are a shareholder of either TSN, HRL, SAFM or PPC this chart is disturbing. Collectively, the gross margins for this industry are below 7%. With gross margins that low how is it possible that they can make any money at all? Clearly, the only way to improve profitability below the gross margin line, is to manage your labor costs efficiently. Apparently some companies are! Yesterday, CNN ran a story about a slaughterhouse being charged with violating child labor laws.

According to CNN, the owner and managers of the nation's largest kosher meatpacking plant were charged Tuesday with more than 9,000 misdemeanors alleging child labor law violations. The company is accused of hiring minors and, in some cases, having children younger than 16 handle dangerous equipment such as circular saws, meat grinders and power shears.

I’m confident that the slaughterhouse 4 would not risk their business on such stupidity, but it highlights the fact that gross margins hold the key to the future of these stocks.

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