In an interview with Time, Prince Alwaleed bin Talal expressed that his hunger for US investments has abated. The focus of the interview was on financial investments but the implications were clear. The Prince’s investment portfolio is hurting, the drop in oil prices is not helping, and there are better opportunities at home in Saudi Arabia.

As you know, the Prince has been an active investor in hotel assets and companies. While not affiliated with Dubai World and other sovereign wealth funds, their fortunes are tied together to a large extent. For US investors hoping for a buyout, strategic investment, capital infusion, etc. of MGM, the hotel companies, or any other gaming/lodging company, this should be required reading.

With the dollar rising, the US is no longer “on sale”. No doubt the bad taste of their US investments is lingering in the mouths of the Sovereigns. Remember: in Feb Dubai World purchased 6.5m shares of MGM at $80 per share (the stock is now $30).

What does this equation add to: Bad investments + lower oil prices + stronger dollar. I’m pretty sure what it doesn’t equate to.

This is sad... I am going to 96% cash

I am sitting here at my desk here in New Haven, CT, listening to investment banker, Hank Paulson on TV, and its truly depressing.

Never mind that I am "making money". A monkey could if he was long the market like I am. This isn't about making money, it's about how everyone is making money here in the very short term. It’s about how this government is making decisions reactively rather than proactively.

In the intermediate term, the shortsighted and reactive decision that Hank Paulson and his cronies have made to ban short selling has delivered a serious blow to capitalism.

I am going to 96% cash. I do not trust these people, their process, or their solution.

This is a sad sad day for American Capitalism,


CKR continues to stress that it will not respond to today’s environment by offering “low priced margin-impairing products,” but rather it is focus on selling “innovative, premium priced products.” At the same time, the company understands consumers are under financial pressure and that there is a critical balancing act between discounting too much (at the expense of margins) and increasing prices too much (at the expense of traffic). Management made some telling comments about just how bad QSR’s promotional landscape has gotten:

“They can’t keep this up before franchisees start filing lawsuits.”
“People this quarter were literally giving food away.”
“they can’t maintain these prices much longer

CKR also explained that adding a slice of cheese to a burger currently adds about $0.30 of costs, which puts MCD’s Dollar Menu double cheeseburger and Wendy’s $0.99 Double Stack cheeseburger into perspective from a margin standpoint.

But the reality of the situation is different that then the rhetoric. See below!

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Beware October 3rd, 2008

"There is no squabbling so violent as that between people who accepted an idea yesterday and those who will accept the same idea tomorrow."
- C. Morley

Take a big red marker and circle Friday, October 3rd, 2008 on your macro calendar. For those of you who proactively prepare for market risk, this has unfortunately moved straight up on my probability chart as a potential day for the US stock market to crash.

The old boy network of Wall Street investment bankers who didn’t see this US financial crisis coming are now politically scrambling the US government to make one reactive and emotional mistake after another in order to temporarily stop gap the inevitable, marking stocks, bonds, real estate, and commodities to market. Last night, SEC chief, Chris Cox, was cajoled by the Goldman Sachs and Morgan Stanley brain-trust to ban short selling in the US Financial stocks. Let me repeat that – the US Government IS PUTTING IN PRICE FLOORS across an entire sub sector of what used to be called a free market. These guys seriously don’t get it.

It’s one thing for John Mack and Lloyd Blankfein to cry wolf and call their own prime brokerage clients (short sellers) evil doers. It’s entirely another thing for individual self serving interests to have the ability to strike regulatory and legislative change in the way that this long standing free market operates. John Mack served as Chairman of hedge fund Pequot Capital in 2005. He knows better.

There is roughly $1.5 Trillion in assets in the hedge fund community – that’s a much larger number than what Long Term Capital Management ran, fyi. Under political fire, Cox’s unprecedented and short sighted decision to lead an SEC ban on short selling in the US Financial stocks until October 2nd has massive repercussions to this market. Ahead of this, if they warned their internal prop desks to cover their shorts yesterday, that would be really bad – I hope they didn’t. Regardless, I highly doubt that they consulted Citadel’s Ken Griffin or Renaissance Capital’s Jim Simmons on this rash move, but go ask those sober and reputable risk managers what this forced SEC decision means to the structure of their hedges. The US Government is effectively going to bludgeon the risk management mechanism that prudent leaders in the investment community have proactively implemented. This is like breaking Brett Favre’s legs.

On October 19th, 1987, the Dow Jones lost 22.3% of its value. US market losses from October 10th 2007 until 1:00PM EST yesterday were approaching -27%. For 11 months, by refusing to allow a free market to mark prices to market, the US Government has chosen to enter the game, and make mistakes, at every turn. Last night’s decision may be its worst yet. They have capitulated to said “leaders” who simply do not understand how this story ends, or do, and are attempting to socialize the downside associated with their risk management mistakes. On October 3rd, 2008, this reactive decision has the potential to create selling from both the long only and short selling community in orders of volume that we have never seen.

I am not trying to be an alarmist. I do not have a self serving agenda here either. The ‘Hedgeye Portfolio’ has the transparency that these said leaders of the investment banking community still refuse to give you. In the Hedgeye Portfolio you will see that I covered my short position in Goldman Sachs a few days ago. I am not short Morgan Stanley. In fact, I am not short one name in the US Financial sector. On market weakness, I moved from 84% to 76% cash this week. The futures charging higher this morning will do nothing but enhance by YTD performance. This is not about me. This is about proactively calling out massive tail risk.

Markets across the world are raging higher this morning. Hong Kong closed +9.6%. After being halted for a few days, Russia opened up +18%, and now they are halting it again because the government cannot bear this level of volatility on the bullish side. In London, stocks are +7%, and here in the US, the reality TV sponsors of the largest global stock market mania in world history are as emotionally amped up as I have seen them since October of 2007. These people didn’t understand it then, and they certainly don’t understand it right here and now. Financial historians of this great US system of free market capitalism will remind them all that this October, fully loaded with quarter end hedge fund redemptions that are inspired by this oncoming short squeeze, may very well see history repeat.

Be careful out there,

PSS: Starting Over

I still like this name a lot. As I sit here prepping for next week’s analyst meeting, I’m staring at our sales/inventory/margin chart. It is absolutely classic retail 101. Notice the following path…

1) Business was solid in ’06 into 1Q07. Sales up, inventories down, and margins positive (and stock at $40).

2) Inventories begin to build relative to sales in 2Q and 3Q07 – both standalone PSS and resulting from Stride Rite acquisition. Margins stay positive, but hang on by a thread as inventory builds.

3) PSS can’t hold the line with margin, and by 4Q07 falls into a negative margin position – along with high inventories and low sales. Stock tests single digits.

4) 1Q08: Margins still down, but inventories clean up. Stock finds bottom.

5) 2Q08: Sales/inventory spread in perfect balance, and margins come back to year ago levels. Stock sees high teens.

6) Next stop… Sales/inventory spread goes higher, and margins trend up. As it relates to timing, we’ve got one more quarter of tough margin compares, but 3Q and 4Q are flat-out easy. Importantly, I think we’ll see top line accelerate at the same time as we start to see PSS leverage Saucony, Sperry and Keds. We’ll hear about that on Monday.

The Race To China

With so many companies initiating or accelerating investment in China over the past quarter – I had my team dig in to when each apparel/footwear company started investing in building a Chinese consumer business (i.e. not manufacturing). It’s pretty startling when charted against the Yuan/Dollar. Some companies were ahead of the curve – such as Nike, Adidas, VF Corp, and even Jones Apparel Group (1993 – who would have thunk??). But I’m astounded by the sheer number of companies that invested in China AFTER a parabolic move in currency (bad trade) due to slowing growth in core markets. This chart shows proactive versus reactive strategic planning at its best.

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