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Eye On Boomer Cash...

Time flies, but who could forget Tom Cruise belting into the phone to Cuba Gooding, “show me the money!” in 1996’s ‘Jerry McGuire’. Cruise was playing sports agent back then, but looking forward at the baby boom generation’s impact on this country’s numbers, the market message remains the same.

“Baby boomers” are people born post WWII until 1964. My parents fit that bill. I’m what they call “Gen-X” (born between 1), and I was a born out of the super spike that countries from Canada to Australia experienced alongside that seen here in the USA.

In the USA, 76 million kids were born during the baby boom. That’s a lot of kids. Now they aren’t kids, but they do have a lot of money (provided they aren’t invested Bear Stearns, Lehman, Merrill, etc…).

Importantly, this demographic phenomena isn’t just local – it’s global. Per Wikipedia, “the UK baby boomers held 80% of the UK’s wealth” in 2004. That said, in times of economic duress, as we sit on the 96% position that we proactively allocated to cash, we want to refocus our time and energy on the big picture secular trends that we can invest in. This is definitely one of them.

All the while, do not underestimate or forget that we Gen-X’ers have lived through one of the biggest meltups in US stock market history. So rather than run out and listen to one of the many CNBC entertainers suggesting that every down day could be “the bottom”, sit back, and be patient. Context is always critical. From 1, we saw some of the most powerful bull market manias that we may ever see. As a result, “Millennials” (those born 1) were born on the equivalent of a US economic 3rd base. Do they get that?

What I do get, are the numbers. McKinsey was kind enough to issued their math on this subject in the September 2008 issue of ‘The McKinsey Quarterly’. Rather than repeat the obvious, I’ll let that math speak for itself in the table below, and we’ll look forward to speaking with our clients about the asset specific investment implications as we look towards 2015.

(Source: McKinsey Global Institute analysis)

Eye On Free Markets: Ayn Rand Institute...

In the Op-ed section of the ‘Ayn Rand Center for Individual Rights’ this week, there was a solid article written by Amit Ghate titled "In defense of Speculators and Short Sellers" (http://www.aynrand.org/site/News2 JServSessionIdr001=2nqb69i7v1.app14b&page=NewsArticle&id=21553&news_iv_ctrl=1021).

You don't have to be a stock market guru to understand the simplicity of the US Government's compromised position here. Banning short selling is simply un-American. This reality is finally finding its way into a much broader forum of public discussion. This is a very good thing for what we need to get back – free market capitalism.

Having not understood what he was doing when he was talked into doing it by the self interested powers that be of ‘Investment Banking Inc’, there is no way that Chris Cox at the SEC is proactively prepared for the tsunami of rational thought and pushback that he is about to endure. It will hopefully cost him his job.

In order to save you some time, here are the 3 most impactful excerpts from Ghate’s discussion:
  • “let’s ask what the critics consider a “correct” price? Clearly it’s not the price which obtains when all market participants are free to engage in trade based on their best judgment, because this is precisely the free-market price--a price which they so vociferously condemn. But if “too low” and “too high” aren’t judged relative to the free market, what is the standard? Stripped of euphemism: their wishes.”
  • “attempting to set prices by wishing doesn’t--and can’t--work, not for Lenin, Stalin or Brezhnev; or for Paulson, Bernanke and Bush. If prices are to reflect reality, they must be the result of an objective process of discovery and judgment performed by interested actors.”
  • “Speculators and short-sellers don’t create facts, they seek to identify and respond to them; and in the process they help adjust prices to economic conditions and establish smooth and liquid markets. As a result--instead of being scapegoated and banished--they should be respected and welcomed for the productive role they play in our markets.”


Over the past 12-months CAKE has taken significant steps to reshape the company and focus on utilizing capital more efficiently for shareholders. Unfortunately, due to commodity pressures and the fact that CAKE is a California-centric company, the macro issues are overwhelming any initiatives the company is taking to improve its business.

While, milk and dairy products represent only 5% of CAKE’s COGS, the trend toward easing commodity costs will help market psychology. Over the past month, milk has been headed south and the latest numbers from the government suggest that further declines are likely. While this will not provide any solace to CAKE shareholders this quarter (CAKE has contracted a majority of its cream cheese costs for the balance of 2008), the commentary coming out of the quarter will be more positive than negative for this key commodity.

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With the market’s tepid response to the bailout bill passed this afternoon in Congress, we’ve had our “Eyes” on the 30 Day Fed Fund Futures. We have no doubt that the government will continue to use whatever measures necessary to create liquidity and, by default, attempt to support the stock market. The next tool of intervention is likely to be another cut in rates. Since the passage of the bailout bill, the October Fed Fund Futures contract is trading 98.44. The market is thus pricing in a 100% likelihood that the Fed will cut by 50 bps on Oct.29th and a 24% change of a 75 bps cut.

Daryl Jones
Managing Director
30 Day Fed Funds Futures

YUM – Lower 2H08 Expectations, Less than 10% EPS growth

YUM is scheduled to report 3Q earnings on Tuesday after the close. Although the company raised its full-year 2008 EPS growth guidance to up 12% following its 2Q results, this reflects a significant slowdown in YOY growth in the back half of the year as 1Q and 2Q EPS grew 18% and 16%, respectively, excluding one-time items. It is important to remember that YUM’s FY08 EPS growth is being helped by the company’s expected share buy backs, which will reduce shares outstanding by 8% (down 8.5% in 1Q and down 9% in 2Q). As I have said before, YUM management’s compensation is tied to EPS growth so I do not doubt management will find a way to achieve its long-term full-year EPS target of at least 10%.
  • This slower 2H08 earnings growth can be partly attributed to tougher revenue and operating profit comparisons, particularly in 3Q, on top of an already tough operating environment (increasing commodity costs in each of YUM geographic segments). On a consolidated basis, YUM is facing its toughest top-line comparison in 3Q (3Q07 revenues grew 12.6%). YRI and China both had strong quarters from a revenue standpoint in 3Q07 while the U.S. experienced a 5.8% revenue decline. Unfortunately, easy comparisons no longer provide much cushion for YUM’s U.S. segment as 1Q07 and 2Q07 YOY declines were worse than 3Q07 and results continued to be soft in 1H08. These recent declines stem primarily from declining trends at KFC, which the company does not expect to see any material improvement from until 2009 (also partly attributable to company refranchising).
  • Increasing commodity costs will continue to hurt profits in all three of YUM’s divisions with management guiding to a one point contraction in restaurant margins for FY08 in China, YRI and the U.S. I would not be surprised to see U.S. restaurant margins decline slightly more than the one point the company is guiding. Management stated that operating profit comparisons get more difficult for YRI and China in 3Q, saying, “In the third quarter, we expect YRI will be below our first half profit growth rate as they lap strong year-ago performance.” Regarding China, management stated, “We cannot expect mid-teens same-store sales growth and 30% to 40% profit growth to continue.”

  • An additional headwind for YUM stems from the currency benefit the company has been booking at both its China and YRI segments since early 2005. I think it is worth noting that the currency benefit has grown over time for both China and YRI and helped by 12% and 9%, respectively, in 2Q08. Investors have become accustomed to high, double-digit reported operating profit growth results and this favorable currency impact may not be around forever.

Autumn Chill

Here is something interesting to consider: Since President Eisenhower left office, the only periods that US unemployment has held above 6% for more than 3 consecutive quarters began in October 1974, October 1979 and November 1990 respectively. The start of each of these periods of sustained higher levels of unemployment was also accompanied by initial claims spikes which exceeded the typical seasonal inflections.

The bailout bill has passed, but the liquidity that it will inject into credit markets won’t come soon enough for many small business and service industry employers across the country who face an ugly cycle of cutbacks at year end.

Andrew Barber

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