Sometimes volatility has a directional bias.

Years ago when I was just starting out in the business I worked as part of a proprietary equity derivative group at a midsized investment bank. One of the market sentiment indicators that some of the old timers in the group followed were the difference between the put/call ratios for options individual equities and Indices. The theory was that Index options were primarily used as hedging instruments by large institutions while individual equity options better reflected the hedging and speculation of smaller investors –thus any divergence between the two ratios, particularly on a day with a major directional market move, was seen as a divergence in sentiment between big investors and the rest of us. During yesterday’s rally the put/call ratio for all index options cleared by the OCC exceeded the same ratio for individual equities by 83%. That is the only time that put buyers in the index market have outpaced put buyers in the single stock market by more than 60% on a day in which the S&P was up over 1% so far this year. Obviously the put/call ratios are currently skewed by the net-short ban on financial stocks but it’s still interesting to note that in the face of a 4.3% rally in the S&P 500 the put/call ratio for indices was so heavily skewed negative.

Andrew Barber

Primary Insights– BKC Sales Trends

Based on our “primary insights,” or “grass roots” proprietary research, which included a survey of various Burger King restaurant managers/employees, BKC’s U.S. solid top-line trends appear to have continued in September. Fifty percent of the respondents said they are experiencing better sales trends in September relative to August. About 33% of the restaurants surveyed said trends are stable with the month prior while 17% said sales have slowed sequentially. The two most cited drivers of improved trends were increased coupons/promotions and improved customer service. The former reason is somewhat concerning as same-store sales grew 5.5% at BKC’s U.S. and Canada segment in 4Q08, but margins still declined 230 bps (net of the reimaging program). Please refer to my post from September 28 for more “primary insights” details regarding recent discounting at BKC. Stable to slowing sales trends were attributed primarily to kids returning to school/vacation is over and the slowing economy.

BKC does not provide monthly sales data so we don’t know what trends were in August, but on its August 21 earnings call, management stated that July was a positive month and that it was confident BKC will continue to deliver quarterly consecutive positive comp performance throughout FY09. Management also stated that in 1Q09, however, the company is lapping 1Q08’s U.S. comparable sales growth of 6.8% (U.S. and Canada up 6.6%), its best quarter since the beginning of BKC’s turnaround in 2004. On average, the restaurants surveyed are seeing a 4.4% lift in same-store sales in September, which is somewhat slowed from the past two quarters of 5%-plus growth, but still a strong number relative to the comparison from 1Q08.

Casey From VFC's Meeting

Here are Casey Flavin’s thoughts after the kick-off dinner for VFC’s analyst meeting in So Cal. Some interesting tid-bits on acquisition strategy…
Sat with CEO at Dinner. He seemed confident in guidance they've given thus far and noted that he has "crystal clear" visibility on the cost side through the spring of 2009 due to locked-in prices. After that, they are assuming 3% cost inflation internally (which sounds low).

In discussing the timing of acquisitions and the fact that the company is going to be reliant solely on organic growth in Q4, Eric Weisman (rightfully) stressed that short-term deal timing is largely out of his control, and that he is focused on the multi-year plan.

Talked a lot about the process behind which VFC acquires brands. Sounds like this will be a part of the presentation at the meeting later today.

Last year, all of the acquisitions that were consummated were companies that came to VFC, not vice versa including Seven, which was totally unsolicited. Will VFC have to go after more candidates in ’09 instead of the other way around?

The company is typically in talks with 20-40 companies simultaneously at any given point in time. There is no significant uptick in discussions to note at this time; although VFC thinks/hopes that is very likely to tick up over the next few months.

Culture and financial position of the target is very important.

The company has looked at TBL, but to date there has been either a) cultural fit issues, b) management issues, or c) state of business issues that precluded a deal. [McGough: This sounds like a tonal change from my vantage point. Sounds like VFC won’t chase this one.]

Also discussed the rumor of an interest in UA. Bottom line -- not on the board for discussion.

Other nuggets:
a. Very positive on TNF opportunity in china
b. At the end of 2 yrs they will already surpass their 5 yr targets for that business
c. Essentially trying to create and outdoor brand presence over there like Nike has done with athletic footwear.
d. North Face is "well over a Billion" dollar brand
e. Wrangler is still substantially bigger
f. TNF and Vans is ~25% of total revs

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Death of Libertarian Wall Street

“I call it a bottom. Not just for the stock itself, which happens to be the venerable Bear Stearns, but for the whole stock market, and for the long-suffering housing market, too” - Jim Cramer, March 21, 2008.

Something tells me Jim Cramer is not a Libertarian. Only about 200,000 Americans are actually registered Libertarians. How then can I declare the death of a movement that barely registers on the voter registry? Was it ever alive? Indeed it was. In a 1991 Library of Congress survey of the most influential books on Americans, The Holy Bible came in first. Nobody can credibly claim that Christianity was ever dead, at least not in this country. Number 2 on the list? The Libertarian manifesto: Ayn Rand’s Atlas Shrugged.

While they may not have known it, a huge number of Americans, including much of Wall Street, shared Libertarian ideals. I write that in the past tense. The shift away from Libertarianism involves more than just less free markets, but it is here where it is most glaring. When Wall Street cheers government intrusion into our economy by sparking 5% rallies and sells with even greater force any uncertainty to that intrusion, I see a cloudy future for economic freedom.

Surprisingly, it is not the Wall Street capitalists fighting against government interference. According to Rasmussen Reports, only 24% of Americans support the $700bn bailout and 60% think the government will go too far. Bravo. For Wall Street, supposedly comprised of the best and the brightest, to ignore the economic realities of the past is shameful.

Governments have stymied innovation and capital flow, turned recessions into depressions, created a lost economic decade (the 70s), and also subsidized and unreformed Fannie and Freddie, two of the biggest blemishes on our economy. And we are begging them to get involved again? Reagan once said “Government doesn’t solve problems, it subsidizes them.”

Well, Wall Street is certainly playing for a big fat subsidy to solve its problems. So I’m calling the end of an era; the death of our 25+ year relationship with Libertarianism. But I’m making it retroactive. The deathblow wasn’t AIG, Fannie and Freddie, or the current $700bn bailout plan. I look to March 17th, when our government decided it was necessary to bail out a rounding error of our economy, Bear Stearns. Government interference with Bear Stearns did nothing to aid housing, the financial sector, or our economy but it did do something. It reintroduced “Moral Hazard” back into our lexicon and sounded the buzzer for another tip-off of the serious game of socialism vs capitalism. Except it is not a game. It is our economic future.

Not surprisingly, world markets are generally up today, although not much, following the US lead from yesterday. It looks like the roller coaster ride in the US stock market will continue as futures are indicated sharply lower. No volatility relief in sight with our government driving the economic car. Today is the first day of the new quarter. Redemptions have been on everyone’s mind and by now funds know what they have to do. Be prepared for some crazy individual stock moves over the coming weeks.

Harvard economist Jeffrey Miron wrote an interesting piece on calling for “bankruptcy, not bailout.” Sorry Mr. Libertarian, this bailout is going to happen so let’s get on with it and we can start shorting stocks again. Libertarianism is losing and its opponent has almost all of the points. The refs are controlling the game. When the best team doesn’t win its called socialism.

Try and stay free out there.

Todd Jordan
Managing Director

Crisis In Context: 1987 vs. 2008

When Andrew Barber sent me the data set behind this chart, I told him it had to be wrong. It's not.

This crisis is far from over. Be certain of that.

China: Getting More Constructive...

With the Chinese stock market down almost 70% peak to trough, and articles beginning to appear in the consensus press discussing a slowing China, we are naturally starting to get more constructive on being long China via the iShares FTSE Xinhua China 25 ETF, FXI. Classic contrarian indicators are supported by a number of fundamental factors – capitalism, commodities, and currency.

The Chinese stock market is becoming more capitalistic as markets around the globe, including the United States, are becoming less capitalistic. Notably, as we mentioned in the “Early Look” on September 26, 2008, the Chinese government signed off on a plan to “allow margin lending and short selling” four days ago. Ironically, this Communist regime is providing investors more investing “freedom” as governments around the globe, led by the United States, have been banning short selling. Simply, we like to invest in markets where capitalism is expanding.

The CRB Commodities index, which is a compilation of 19 major commodities, reported its single largest down day since 1956 yesterday. This is deflationary. The steady decline of global commodity prices since their May / June 2008 peak has also been deflationary. Clearly, the roughly 70% decline in the Chinese market since its peak is already reflective of a slowing growth outlook, which has now morphed into consensus (see “Beijing Slowdown” in the Wall Street Journal today). We believe the second derivative of this slowing growth, commodity deflation, will serve as a positive catalyst for the Chinese market.

Finally, the Chinese Yuan appears to have put in a top in mid July 2008 versus many major currencies, in particular the US Dollar. As a country whose competitive advantage is cost to produce goods (labor) versus the rest of the world, the lower its costs are in its currency versus the currencies of its major customers, the more appealing its export outlook will become. The Chinese Yuan should only continue to decline as China has signaled a willingness to cut rates with its first easing in 6 years earlier this month. Chinese interest rates have a lot further to fall versus rates in the U.S. (Chinese benchmark rate is currently at 7.2% versus 2.0% in the United States).

Daryl Jones
Managing Director

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