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DIN – AN INTERESTING TURN OF EVENTS

I thought this was an interesting turn of events. On Friday, MSD Capital (Michael Dell’s group) converted their friendly “G” filing into a not so friendly 13D filing. They own 14% of the common stock and a chunk of the preferred… As you read Item 4 of the filing, keeping mind that DIN is over 7x levered.

Item 4. Purpose of the Transaction.

"The Reporting Persons now intend to have further discussions and other communications with the Company’s management and members of its Board of Directors regarding debt repayment, changes in the Company’s capitalization and dividend policy, disposition of Company owned restaurants, composition of senior management including the hiring of a new Chief Financial Officer and the composition of its Board of Directors."

It goes on……

"The Reporting Persons may also have conversations with other stockholders. In the course of such conversations with members of management, the Board of Directors and other stockholders, the Reporting Persons may suggest actions that could result in, among other things: (a) the acquisition by the Reporting Persons of additional securities of the Company, or the disposition of securities of the Company; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or any of its subsidiaries; (d) changes in the present board of directors or management of the Company; (e) a material change in the present capitalization or dividend policy of the Company; (f) any other material change in the Company’s business or corporate structure; (g) changes in the Company’s certificate of incorporation or bylaws or other actions which may impede the acquisition of control of the Company by any person;"

I have never met the people managing MSD Capital, but I’m sure their future plans will not include the current CEO of DIN.

Ukrainian Bear Hug

Ukraine leaders fight over how to handle economic and political pressure from Russia while their market tumbles, the fallout from this could spread…

The unilateral withdrawal of President Viktor Yushcenko’s Our Ukraine party from the ruling democratic coalition on Tuesday placed the already battered Ukrainian Stock market under further pressure as the hard line pro democracy leader (whose face is still scarred from a poisoning that he believes was the work of Russian agents) continues to accuse Putin’s cadre of attempting to destabilize his country and his former coalition partner Prime Minister Yulia Tymoshenko of pursuing a course of appeasement.

With political crises exacerbating the effects of global financial meltdown, the Kinto cap weighted Ukrainian index (KINDEX) reached levels this week more than 55% below where it started the year –prompting PFTS exchange President Iryna Zoria to call on Kiev to pursue stimulus measures similar to those adopted in Moscow. Zoria also decried the National Bank of Ukraine's policy of fighting inflation by withdrawing funds saying that it “impedes the fight against the liquidity crisis and is not in line with the measures of international financial regulators.”

Relations between Russia and Ukraine (never good) have been in steady decline since Kiev first stated its desire to join NATO, but the pace has accelerated sharply since the events of August. Yushcenko’s party issued a manifesto on Ukrayinska Pravda’s website yesterday which will do nothing to ease tension:

“…..Our Ukraine demands that possible coalition partners condemn the act of military aggression by the Russian Federation against Georgia, strive for the immediate restoration of Georgia's territorial integrity and the withdrawal of Russian troops from sovereign Georgia; condemn the use of Ukraine's territory for waging a military attack by the Black Sea Fleet of the Russian Federation against Georgia…………….
……………The Our Ukraine People's Union insists on the need to diversify energy sources and to ensure the pumping of oil via the Odessa-Brody oil pipeline from Odessa to Brody.”

Until now the Russian response has been limited to threats ranging from potential tariffs on Ukrainian exports to Russia (the Russian market currently accounts for 25% of the Ukraine’s total sales abroad) to the expulsion of diplomats but, as rhetoric heats up so does the possibility of sanctions from Moscow.

It is very important to note that roughly 75% of all of Ukraine’s natural gas supply either originates from, or passes through Russia. Additionally, Ukraine is also the conduit for an estimated 85% of the natural gas that Russia supplies to EU markets. Any move by Putin to use Russian energy supply as a means of punitive action against Kiev could help local instability spill into the broader European energy market rapidly.

Andrew Barber
Director

Eye on Leadership: 'You Tubing' Hank Paulson ...

The following is my paraphrasing of this morning’s NBC “Meet The Press” interview, alongside my views.

Overall, I’d say that Hank Paulson is a good man who is trying hard, but that doesn’t make him the right person to be managing this situation. There never was a proactive risk management process in place. He continues to rush into decisions, reactively, without consulting a bi-partisan team of credible financial experts. I have seen this movie before. It doesn’t end well. We need someone to takeover, sooner than he can scare Congress into implementing these hurried decisions.
KM

Tom Brokaw = TB
Hank Paulson = HP
Keith McCullough = KM

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TB
If you brought this deal to your Partners at Goldman, they’d send you out and say “come back when you have more answers”, wouldn’t they?

HP
Tom, I don’t look at it that way. This is not something that we wanted to do, this is something that is very necessary… American companies were not able to raise financing, this is very serious.
*KM
Of course he doesn’t look at it that way. In 2005-2006 it was all about making as much money as he and his Partners at Goldman could. Now he wants to socialize
the downside of their losses. This is very serious, for the investment banking firms who are locked into these compromised operating structures. Very serious,
indeed

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TB
The cover of Newsweek calls you “King Henry”. Richard Shelby says you are jumping from crisis to crisis like putting out brush fires…

HP
Tom, there are a lot of questions… and I can understand there are a lot of questions… let me address the first part, the cost… we can’t determine what the cost will be
today… this is not a position where I like to see the tax payer, but this is far better than the alternative… the average American watches the stock market; they watch
the market drop about 1000 pts, then recover on this plan… what they don’t see is what is going on in the credit market. This is a serious situation and we need to
avoid it.
*KM
This was the hardest answer to watch Hank stutter through. He doesn’t know the cost, and he won’t be around to be held accountable to it in the end anyway. He
says it’s all about the credit market, but at the same time, he only makes these hurry up offense decisions when the stock market is going down, and John Mack and
Llloyd Blankfein are crying wolf about evil doer short sellers. I don’t get it.

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TB
Is the stock market’s rally late in the week a false positive?

HP
It’s not what we should be looking at… we need to be looking at what is going on in the credit market… it is very fragile and frozen… and we do something to deal with this, and do it quickly.
*KM
Right, right… don’t look at the stock market folks… c’mon Hank.

---

TB
Are the fundamentals of the US economy staggering?

HP
What I would say is I won’t bet against the American people… I would not bet against the long term fundamentals of this country…
*KM
In English the answer to Brokaw’s question is yes. See all comments from Paulson, including those back in April where he called the credit crisis being behind us, where his answer to this question has always been no.

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TB
You want this all to be run by the Treasury Dept – Warren Buffett says we need a non-partisan czar like Bloomberg to run it – why isn’t that a better idea than having Treasury run it, because you are going to leave Treasury in January?

HP
Tom, what I am doing is reacting to the situation we have in front of us today… we have authority to move very quickly… the plan we have is one that will work… future administrations can run this anyway that they would like to run it…
*KM
This is very straightforward. Paulson wants nothing to do with a partisan decision making team that proactively prepares for the next 3-5 years, or 3 to 5 months for that matter. He is “reacting” to an economic crisis that he didn’t foresee. He asks his investment banking friends for help rather than building a team of credible experts (Buffett, Bloomberg, Griffen, etc...).

---

TB
But why not start a new process, structure, and regulation now?

HP
We need to manage these assets and manage them quickly – that is the situation we have in front of ourselves today…
*KM
Again, he didn’t have time to do it right, and he certainly isn’t taking the time to do it over properly. Rush, rush, rush…

---

TB
And simultaneously develop new regulations?

HP
No Tom, that’s not doable immediately… what’s going on here is terrible it’s inexcusable, and we need to deal with it… but that is going to take some time to figure that out and do it carefully and well… we can’t deal with that in a week, we need this legislation in a week, because we have a problem in our capital markets to deal with…
*KM
The problem in our capital markets is the people calling the shots. We have a crisis in both judgment and leadership in the US Financial System. These people rush into every decision, and use broad stroking alarmist rhetoric to strike a chord with politicians who readily support them.

---

TB
Some people are concerned with your ad hoc approach. You let Lehman fail, but Hank Greenberg at AIG says he could have saved the company for $20B.

HP
A lot of people are saying a lot of things Tom, and a lot of people want to rewrite history, but we have had some tough situations to deal with here, so let me go through them one at a time… there were no buyers for Lehman – it was a very sad situation… AIG was a few hours away from declaring bankruptcy – the government came in and avoided a real catastrophe in our financial markets… AIG created very much a hedge fund on top of insurance companies – something like this in my judgment should have never happened
*KM
If AIG is a hedge fund, what is Goldman Sachs?

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TB
Sophisticated investors are pulling their money out of money market accounts – the domino effect here is going to be a no growth economy isn’t it?

HP
Tom, you made my case for me. That is why we need these powers. That is why we need Congress to move quickly… it pains me tremendously to put the American tax payer in this position, but it’s better than the alternative… but we need to do it
*KM
The alternative is to let free markets trade. Every time the brain-trust of Investment Banking Inc. intervenes, and/or regulate their clients rather than themselves, this creates a more protracted downturn. Governments don’t end bear markets. Investment bankers don’t either.

Keith R. McCullough
CEO and Chief Investment Officer
Research Edge LLC

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Yielding no Yield

For those tracking my Partner Keith’s macro work, you know that he’s taken the Hedgeye Portfolio (sadly) to 96% cash. What little long exposure we like here at Research Edge is geared towards yield. In that vein, I ran a screen starting over a group of 447 global textile, apparel, and footwear brands, retailers, and sourcing companies I in search of yield.

Not much hope… The first point worth noting is that the first US company on the list (Blythe) was number 64 on the list with a yield of 4.1%. No other US company over 4%. The average non-US company, however, was 6.3%. Yes, there are differences in risk profile associated with small public companies in third world countries that throw off this comparison to some extent. But even relative to both historical and US equity market standards, this space is not particularly cheap on a yield basis.


Sign of the Fashion Apocalypse

Think back to August 2007 for a minute. Jones Apparel Group auctions off Barney’s and a bidding war ensues between Japan’s Fast Retailing and Istithmar -- a government-backed Dubai firm. We all know who won. Why is it no surprise that the company backed by oil money beat the one who is trying to acquire luxury assets to escape exposure to a local economy that has average 1.35% over 10 years?

Well, Dubai is at it again. The Dubai International Financial Center (owned by the Dubai government), has taken a majority stake in Villa Moda, which operates seven multi-brand ‘emporiums’ in the Gulf region and roughly 50 designer shops for brand such as Gucci, Prada, and Dolce & Gabbana. These are super high-end shops with price tags that border on ridiculous to 99% of America (most of Wall Street included).

Rational for the government cash infusion? Fueling a new global growth push. Probably not a bad idea given that few others could afford such a move. For Villa Moda’s sake, let’s just hope there are enough people left who want to pay $300 for a pair of cashmere socks.

By the way, check out the site. Some interesting brand call outs. They sell Seven (VFC) but not Ralph Lauren, Adidas but not Nike. Several other interesting notes…

TBL: Duty Issue is Back and Better than Ever

As usual, this issue is misunderstood. When it comes up, TBL trades down, though I think the opposite should happen relative to earnings expectations.
The issue surrounding EU anti-dumping duties on Chinese and Vietnamese leather goods reared its head again last week. I’ve had more than a few inquiries given its importance to Timberland, but the bottom line is that I think this is a non-event, and would even go as far as to say that the backdrop supports a positive change over the next 12 months.

As backdrop, two years ago, the EU imposed anti-dumping duties on product imported from China and Vietnam to protect local suppliers. Given TBL’s exposure to Europe (1/3 of total), this cost the company $9-$10mm or ~100bps in EBIT margin (Big on a 5.7% base). This duty expires on October 8th, which triggers a review process that could extend the duties by upwards of one year.

The important point here is that I don’t have any duty recapture in my model, and my sense is that the Street’s models do not either. If they do, then expectations are way too low on other operating metrics.

I’d also note that the EU is under more pressure to remove these anti-dumping duties today than 2 years ago. Whether or not the duties were even necessary was a hot debate in the first place given the vast difference in quality and label for European brands vs. those made in Asia. Now – with a weaker consumer spending environment and higher inflation, consumer interest groups such as EuroCommerce, BEUC and AEDT are leading a unified push to bring said duties to an end. If this were to occur, I’d have to take up my estimates for TBL, which are already above consensus.

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